# UNITED STATES        SECURITIES AND EXCHANGE COMMISSION        WASHINGTON, D.C. 20549

FORM 10-K

|  |   | ANNUAL                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                    1934                    For the fiscal year ended July 31, 2007 |
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OR

|  |   | TRANSITION                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                    1934                    For the transition period from _______________ to _______________ |
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Commission File        Number 0-12927

|                                                                                      | NATIONAL HOME HEALTH CARE CORP.(Exact Name of Registrant as Specified in Its Charter) |                                                              |
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|                                                                                      |                                                                                       |                                                              |
| Delaware(State or Other Jurisdiction of                    Incorporation or Organization) |                                                                                  | 22-2981141(I.R.S. Employer                    Identification No.) |
|                                                                                           |                                                                                  |                                                                   |
| 700 WHITE PLAINS ROAD, SCARSDALE, NEW YORK                                                | 10583                                                                                 |
| (Address of Principal Executive                Offices)                                   | (Zip Code)                                                                            |

Registrant’s telephone number,        including area code: 914-722-9000

Securities registered pursuant to        Section 12(b) of the Act: None.

Securities registered pursuant to        Section 12(g) of the Act: Common Stock, par value $.001 per share.

Indicate by check mark if the        registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes  No 

Indicate by check mark if the        registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the        Act. Yes  No 

Indicate by check mark whether the        registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the        Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period        that the registrant was required to file such reports), and (2) has been subject to such        filing requirements for the past 90 days. Yes  No        

Indicate by check mark if disclosure        of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and        will not be contained, to the best of registrant’s knowledge, in definitive proxy or        information statements incorporated by reference in Part III of this Form 10-K or any        amendment to this Form 10-K.              

Indicate by check mark whether the        registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.        See definition of “accelerated filer and large accelerated filer” in Rule 12b-2        of the Exchange Act. (Check one):

| Large                Accelerated Filer | Accelerated                Filer | Non-Accelerated                Filer |
|----------------------------------------|----------------------------------|--------------------------------------|

Indicate by check mark whether the        registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes         No 

The aggregate market value of the        Common Stock of the registrant, its only class of voting securities, held by non-affiliates        of the registrant, calculated on the basis of the average of the closing bid and asked        prices of the Common Stock as of the last business day of the registrant’s most        recently completed second fiscal quarter (January 31, 2006), was approximately        $31,524,295.

The number of shares of the        registrant’s Common Stock outstanding on October 26, 2006 was 5,662,531.

Certain information to be included        in the registrant’s definitive proxy statement, to be filed no later than 120 days        after the end of the fiscal year covered by this report, for the registrant’s 2006        Annual Meeting of Stockholders is incorporated by reference into Part III of this Annual        Report on Form 10-K.

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# TABLE OF        CONTENTS

|                      |                                                                                                                                            | Page     |
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|                 | PART I                                                                                                                                     |     |
| Cautionary Statement | 1                                                                                                                                     |
| Item 1.              | Business                                                                                                                                   | 1   |
| Item 1A.             | Risk Factors                                                                                                                               | 11  |
| Item 1B.             | Unresolved Staff Comments                                                                                                                  | 14  |
| Item 2.              | Properties                                                                                                                                 | 15  |
| Item 3.              | Legal Proceedings                                                                                                                          | 16  |
| Item 4.              | Submission of Matters to a Vote of Security Holders                                                                                        | 18  |
|                 | PART                II                                                                                                                     |     |
| Item 5.              | Market for Registrant's Common                Equity, Related Stockholder Matters and Issuer Purchases of Equity                Securities | 18  |
| Item 6.              | Selected Financial                Data                                                                                                     | 20  |
| Item 7.              | Management's Discussion and                Analysis of Financial Condition and Results of Operations                                       | 21  |
| Item 7A.             | Quantitative and Qualitative Disclosures About Market Risk                                                                                 | 30  |
| Item 8.              | Financial Statements and Supplementary Data                                                                                                | 30  |
| Item 9A.             | Controls and Procedures                                                                                                                    | 30  |
| Item 9B.             | Other Information                                                                                                                          | 31  |
|                 | PART                III                                                                                                                    |     |
| Item 10.             | Directors and Executive Officers of the Registrant                                                                                         | 31  |
| Item 12.             | Security Ownership of Certain                Beneficial Owners and Management and Related Stockholder                Matters               | 31  |
| Item 13.             | Certain Relationships and                Related Transactions                                                                              | 31  |
| Item 14.             | Principal Accountant Fees and Services                                                                                                     | 31  |
|                 | PART                IV                                                                                                                     |     |
| Item 15.             | Exhibits and Financial Statement Schedules                                                                                                 | 28  |

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# PART I

****Cautionary        Statement****

        The Annual Report on Form 10-K contains certain forward-looking statements that involve a        number of risks and uncertainties. Forward-looking statements may be identified by the use        of forward-looking terminology such as “may,” “will,”        “expect,” “believe,” “estimate,” “project,”        “anticipate,” “continue,” or similar terms, variations of those        terms or the negative of those terms. Important factors that could cause actual results to        differ materially from those indicated by such forward-looking statements are set forth in        this document. These include but are not limited to risks and uncertainties relating to        whether the Company can identify, consummate and integrate on favorable terms acquisitions        or market penetrations; market acceptance; pricing and demand for the Company’s        services; changing regulatory environment; changing economic conditions; whether the        Company can attract and retain qualified personnel; ability to manage the Company’s        growth; and other risks detailed in this document. Please refer to “Risk        Factors” in Item 1A and “Management’s Discussion and Analysis of        Financial Condition and Results of Operations” in Item 7.

| **Item 1.** | ****Business**.** |
|-------------|-------------------|

         

**General**

        National Home Health Care Corp., a Delaware corporation, and its subsidiaries (the        “Company”), is a provider of home health care services, including        nursing care, personal care, supplemental staffing and other specialized health services in        the North Eastern part of the United States.

**Industry Overview**

        United States health care spending continues to outpace the rate of inflation, and the        population of older Americans continues to increase. The Company believes that alternatives        to costly hospital and nursing home stays will continue to create demand for home health        care. Medicare, Medicaid and other managed care insurance companies continue to look for a        setting whereby the aged population can receive health care services most cost efficiently.        Home health care has evolved as the acceptable and most preferred alternative in this        continuum. Patient comfort and substantial cost savings can generally be realized through        treatment at home as an alternative to traditional institutional settings. Continuing        economic pressures within the home health care industry and the changes to Medicare        reimbursement have forced providers to modify the manner in which they provide home health        care services. Those companies that successfully operate with efficient business models can        provide quality patient care and manage costs under the current reimbursement system.

        The home health care industry has traditionally been highly fragmented, composed of        not-for-profit and for-profit smaller local home health agencies offering limited services.        These smaller agencies do not generally have the necessary capital to expand their        operations or services and are often unable to achieve the cost efficiencies to compete        effectively. The implementation of the Medicare Prospective Payment system and other        legislation at the state levels has created major industry consolidation.

         

        -1-

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**Home Health Care Services**

        Home health care services include four broad categories: (1) home health nursing services,        (2) infusion therapy, (3) respiratory therapy and (4) home medical equipment. According to        statistics from the Centers for Medicare and Medicaid Services (“CMS”) Office        of the Actuary, total expenditures by payers on home health nursing services was        approximately $43 billion in 2004. Medicare is the largest single payer, accounting for        approximately $16 billion in 2004.

        The Company currently operates 29 offices consisting of one parent corporate office,        twenty-one offices that coordinate home health care services and seven satellite offices.        The Company has two Medicare provider numbers and is a Medicaid provider in each of the        four states in which it operates. The Company provides a wide variety of home health care        services including:

| ·      | Registered nurses who provide specialty services, such as skilled monitoring,                    clinical nursing assessments, evaluations, clinical interventions, medication                    supervision and/or administration. |
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| ·      | Licensed practical nurses who perform technical procedures, administer                    medications and change surgical and medical dressings. |
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| ·      | Physical and occupational therapists who work to strengthen muscles, restore                    range of motion and help patients perform the activities of daily living. |
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| ·      | Speech pathologists/therapists who work to restore communication and oral                    skills. |
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| ·      | Medical social workers who help families address the problems associated with                    acute and chronic illnesses. |
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| ·      | Home health aides who perform personal care such as bathing or assistance in                    walking. |
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| ·      | Private duty services such as continuous hourly nursing care and sitter                    services. |
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        The Company has five principal operating subsidiaries:

| ·      | Health Acquisition Corp., formerly Allen Health Care Services, Inc.                    (“Allen Health Care”), a New York corporation that conducts home                    health care operations in New York. |
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| ·      | New England Home Care, Inc. (“New England”), a Connecticut                    corporation that conducts home health care operations in Connecticut. |
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| ·      | Connecticut Staffing Works Corp. (“Connecticut Staffing”), a                    Connecticut corporation that conducts health care staffing operations in                    Connecticut. |
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        -2-

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| ·      | Accredited Health Services, Inc. (“Accredited”), a New Jersey                    corporation that conducts home health care operations in New Jersey. |
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| ·      | Medical Resources Home Health Corp. (“Medical Resources”), a                    Delaware corporation that conducts home health care operations in                    Massachusetts. |
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*Health Ac**quisition Corp. d/b/a Allen Health Care Services.* Allen Health Care        is a provider of home health care services in New York State. Services are provided by        personal care aides, home health aides and homemakers (collectively,        “caregivers”). Allen Health Care is licensed by the State of New York        Department of Health (“DOH”). Allen Health Care maintains its principal        administrative office in Jamaica, New York and has a branch office in Hempstead, New York.        Case coordinating of patients is performed at these two offices. In addition, Allen Health        Care has satellite offices in Brooklyn, Mount Vernon and the Bronx, New York. The satellite        offices are primarily used for the recruitment and training of home health aides. Services        are provided in the following counties in the State of New York: Nassau, Westchester,        Suffolk, Queens, Kings, New York and the Bronx.

        Home health care personnel are licensed or certified under a New York State approved        program and can be engaged on a full-time, part-time or live-in basis. Since July 1996,        Allen Health Care has required criminal background investigations for all new personnel. In        addition, urine drug testing is part of the pre-employment screening process and thereafter        is performed annually. In accordance with DOH regulations, effective April 1, 2005, all new        non-licensed employees who are employed to provide direct care or supervision to clients of        Allen Health Care will undergo a criminal history record check by the Federal Bureau of        Investigation. In March 2005, Allen Health Care was re-surveyed by the Joint Commission of        Accreditation of Health Care Organizations (the “Joint Commission”), an        accrediting body for health care providers. The Joint Commission accreditation is        associated with providing quality services. This status is required by many of the        certified home health care agencies (“CHHAs”) and long-term home health care        programs (“LTHHCPs”) that Allen Health Care currently services. The re-survey        resulted in Allen Health Care extending its accredited status through March 2008.

        Allen Health Care is reimbursed primarily by CHHAs and LTHHCPs that subcontract their home        health aides from Allen Health Care, as well as by private payers and the Nassau and        Westchester County Departments of Social Services Medicaid Programs, for which Allen Health        Care is a participating provider.

        Allen Health Care provides home health aide services to its clients twenty-four hours per        day, seven days per week. Although Allen Health Care’s offices are open during normal        business hours, personnel are available twenty-four hours per day to respond to emergencies        and to provide other service requests. The registered nurses of Allen Health Care, in        accordance with DOH regulations and contract requirements, visit patients regularly and        review records of service completed by the home health aide and personal care aides. These        records are maintained by Allen Health Care. In addition, a home care coordinator ensures        that appropriate coverage is maintained for all patients and acts as the liaison among        family members, aides and professional staff.

         

        -3-

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        Allen Health Care has expanded in recent years through selected acquisitions of        complementary businesses or assets in its geographic region. These acquisitions included        the August 1998 acquisition of certain assets of Bryan Employment Agency, Inc., d/b/a Bryan        Home Care Services (“Bryan HomeCare”), a New York licensed home health care        agency that provided home health aide services in Westchester County, New York. This        acquisition expanded the geographic presence of Allen Health Care and enabled it to become        a participating provider in the Westchester County Department of Social Services Medicaid        Program.

        To a large extent, Allen Health Care’s continued growth depends on, among other        things, its ability to recruit and maintain qualified personnel. Allen Health Care’s        training program for home health aides has been approved by the New York State Department        of Health. Allen Health Care believes that it offers competitive salaries and fringe        benefits and has been able to keep its caregivers working on a steady basis.

*New England Home Care, Inc.* In August 1995, the Company acquired New England. New        England is a Medicare certified and state licensed home health care company in Connecticut.        In February 2005, New England was re-surveyed by the Joint Commission, resulting in New        England extending its accredited status through February 2008. New England provides        services throughout Connecticut. Services include skilled nursing, physical therapy,        occupational therapy, medical social services, home health aide and homemaker services. In        addition, New England provides specialty services consisting of adult/geriatric, pediatric,        post-acute rehabilitation and behavioral health. New England provides full-service home        health care twenty-four hours per day, seven days per week. Weekends, holidays and        after-hours are supported by an on-call system for each office location with medical        supervision by a registered nurse at all times. All home health care personnel are licensed        or certified under a Connecticut state-approved program and can be engaged on a full-time,        part-time or live-in basis. New England performs a multi-state pre-employment criminal        background check on all new hires. In addition, a Social Security number verification,        satisfactory employer references and a pre-employment drug screen are required.

        New England maintains its principal administrative office in Cromwell, Connecticut. In        addition, New England has administrative offices in New Haven, West Hartford, Shelton and        Waterbury, Connecticut, and a satellite office in Norwich, Connecticut. Case coordinating        of patients is performed at the administrative offices. Reimbursement for New        England’s services is primarily provided by the State of Connecticut Department of        Social Services Medicaid Program, the Federal Medicare Program, managed care companies,        private payers, hospices and other Medicare certified home health agencies and long-term        care providers that subcontract their home health aides from New England.

        New England has expanded its operations through increased penetration of market share in        Connecticut and selected acquisitions of complementary assets in its geographic region. In        November 1999, New England acquired certain assets of Optimum Care Services of Connecticut,        Inc., Optimum Home Health of Connecticut, Inc. and Optimum Home Care of Connecticut, Inc.        (collectively, the “Optimum Entities”). The Optimum Entities included a        Medicare certified and licensed home health care company engaged in providing home health        care services in Connecticut. The acquisition of these assets was coupled with a successful        penetration of the market share made available as a result of the liquidation of the        Optimum Entities.

        -4-

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        In October 2004, New England acquired certain assets from On Duty Metropolitan Connecticut,        LLC, a Medicare certified and licensed home health care company engaged in providing        nursing and home health care services in New Haven and Fairfield Counties, Connecticut.

        The continued growth of New England depends on, among other things, its ability to recruit        and retain qualified personnel. New England recruits personnel through employee referrals,        newsprint media, internet sourcing, direct mailings and industry networking. New England        believes that it offers competitive salaries and fringe benefits and has been able to keep        its employees working on a steady basis.

*Connecticut Staffing Works Corp.* Connecticut Staffing was organized in October 1999        to operate certain of the assets acquired from the Optimum Entities. Connecticut Staffing        is a full-service health care staffing company, maintaining its main administrative office        in Cromwell, Connecticut. It provides temporary staffing to hospitals, skilled nursing        facilities, long-term care centers, occupational health sites, juvenile detention centers,        correctional facilities, group homes, schools and other institutions. Staffing personnel        include registered nurses, licensed practical nurses, certified nursing assistants, medical        secretaries and medical assistants. Staffing services are provided twenty-four hours per        day, seven days per week. Staffing coordinators are available in the office Monday to        Friday 6:00 a.m. to 5:00 p.m., Saturday 6:00 a.m. to 2:00 p.m. and Sunday 6:00 a.m. to 12        noon. Holidays and after hours are supported by an on-call system which pages a staffing        coordinator. Connecticut Staffing performs a multi-state pre-employment criminal background        check on all new hires. In addition, a Social Security number verification, satisfactory        employer references and a pre-employment drug screen are required.

        Connecticut Staffing maintains a roster of quality professional personnel. The continued        success of Connecticut Staffing is dependent on, among other things, its ability to        maintain a steady roster of per diem workers to meet the staffing requirements of its        clients. Connecticut recruits personnel through employee referrals, newsprint media,        internet sourcing, direct mailings and industry networking. Connecticut Staffing believes        that it offers competitive salaries and fringe benefits and has been able to keep its        personnel working on a steady basis.

*Accredited Health Services, Inc.* In October 1998, the Company acquired Accredited.        Accredited is a licensed health care service firm that provides home health aide services        in Bergen, Hudson, Passaic, Essex, Morris, Union, Somerset, Middlesex, Monmouth and Ocean        Counties, New Jersey. Accredited maintains its principal administrative office in        Hackensack, New Jersey and has branch offices in East Orange and Toms River, New Jersey.        Case coordinating of patients is performed in Hackensack and the other two branch offices.        Accredited also has satellite offices in Jersey City, Union City and Paterson, New Jersey        that are used for recruitment, in services and orientation of home health aides.

        Accredited provides home health care services to its clients twenty-four hours per day,        seven days per week. Weekends, holidays and after-hours are supported by an on-call system        for each office. All home health aides are certified under a New Jersey state-approved        program and can be engaged on a full-time, part-time or live-in basis. Accredited has been        approved by the New Jersey Board of Nursing for the training of home health aides in the        State of New Jersey. Effective November 2003, all home health aides of Accredited have        criminal background checks performed by the State of New Jersey.

        -5-

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        In September 2006, Accredited was re-surveyed by the Commission on Accreditation for Home        Care (CAHC), one of the accrediting bodies required for participation as a Medicaid        provider in New Jersey. This accreditation was extended for an additional year. In        September 2007, Accredited was re-surveyed; the results of that survey have not been        received. Reimbursement for Accredited’s services is primarily by the State of New        Jersey Medicaid Program, Medicare certified home health care agencies that subcontract        their home health aides from Accredited and private payers.

        In May 2005, Accredited completed the acquisition of Helping Hands Health Care        (“Helping Hands”). Helping Hands provided home health aide services in Bergen,        Hudson, Passaic, Essex, Morris, Union, Middlesex, Somerset, Monmouth and Ocean Counties,        New Jersey.

        Accredited’s growth depends on, among other things, its ability to recruit and retain        qualified home health aides. Recruiting is conducted primarily through advertising, direct        contact with community groups and employment programs, and programs designed to encourage        new employee referrals by existing employees. Accredited believes that it offers        competitive salaries and fringe benefits and has been able to keep its caregivers working        on a steady basis.

*Medical Resources Home Health Corp.* In September 2002, the Company, through a        wholly-owned subsidiary, acquired certain assets of Medical Resources, Inc. and related        entities (collectively, the “Medical Resources Entities”). The Medical        Resources Entities provided home care services in Massachusetts.

        The Massachusetts State Home Care Program provides services to approximately 40,000 frail,        low income elders throughout the state. The funds and services are managed through        twenty-seven Aging Service Access Points (“ASAPs”) that are not-for-profit        organizations geographically dispersed throughout the state. Services provided through this        state program include homemaking, personal care and companion. Medical Resources has        contracts with certain of these ASAPs to provide homemaking and personal care services.        Services are provided twenty-four hours per day, seven days per week. Weekends, holidays        and after-hours are supported by an on-call system staffed by coordinators and registered        nurses. From inception, Medical Resources has performed criminal background investigations        on all new personnel.

        Medical Resources maintains its principal administrative office in Newton, Massachusetts        and has satellite offices in Boston, Lynn, Framingham, North Andover, Leominster,        Worcester, Chicopee, Bellingham, North Dartmouth and North Easton, Massachusetts. Case        coordinating of patients is performed in Newton and the satellite offices. The satellite        offices are also used as drop-off offices for paperwork, recruitment, in services, training        and orientation of new personnel.

        In April 2003, Medical Resources received its Medicare certification from the CMS. In June        2003, Medical Resources received its Medicaid provider number from the Commonwealth of        Massachusetts. As a result of receiving these certifications, Medical Resources expanded        its services to include nursing, physical therapy, occupational therapy, speech therapy,        medical social services and home health aide services to Medicare and Medicaid        recipients.

        -6-

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        The growth of Medical Resources depends on, among other things, its ability to recruit and        retain staff as well as its ability to generate referrals of Medicare, Medicaid and Managed        Care patients. Medical Resources believes that it offers competitive salaries and fringe        benefits and has been able to keep its employees working on a steady basis.

**Organization**

        The Company’s corporate headquarters is located in Scarsdale, New York, where all        senior corporate administrative functions are performed. The Company’s operations are        conducted by its five operating subsidiaries. Although the Company maintains separate        subsidiaries in its various jurisdictions of operations, it reviews its operations        primarily on an integrated rather than geographic or separate-subsidiary basis. Each        subsidiary has a main administrative office where all management functions are performed        and overseen by the subsidiary President. Each administrative office performs intake and        case coordinating of patients, corporate compliance, human resources, marketing and all        financial and accounting functions.

**Insurance**

        The Company and its subsidiaries maintain casualty coverages for all of its operations,        including professional and general liability, workers’ compensation, automobile,        property, fiduciary liability and directors and officers insurance. The Company reviews its        insurance coverages throughout the year to insure that adequate coverages are in place. In        the State of New York, the Company self insures up to specified limits certain risks        related to workers’ compensation. While the Company believes its insurance policies        are adequate, in the wake of the terrorist events of September 11, 2001, the Company has        experienced substantial increases in the cost of its insurance coverage. As a result, there        can be no assurance that coverage will continue to be available in adequate amounts or at a        reasonable cost.

**Employees and Labor Relations**

        As of October 27, 2007, the Company had approximately 3,680 full and part-time employees.        The Company currently employs the following classifications of personnel: administrative        employees which consist of a senior management team (CEO and CFO) of the parent company and        a COO, CFO and vice-presidents at each subsidiary company; office administrative staff,        nursing directors and clinical managers; sales and marketing executives; licensed and        certified professional staff (RNs, LPNs, therapists); and non-licensed care givers (home        health and personal care aides). The Company has standardized procedures for recruiting,        interviewing and reference checking prospective health care personnel. All nurses and home        health aides must be licensed or certified by appropriate authorities.

        Effective July 1, 2007, Allen Health Care and District Council 1707, American Federation of        State, County and Municipal Employees (“AFSCME”), concluded negotiations on a        new three-year labor contract. The previous labor contract expired on April 30, 2007. This        new labor contract provides “covered” home health aides with some additional        benefits, consisting of an immediate wage increase, an increase in minimum hourly base        rates, a bonus program and holiday premium pay. The Company has no other union contracts        with any of its employees. The Company believes its relationship with its employees is        satisfactory.

        -7-

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On February 28, 2006, Lerai Jones,        individually and on behalf of all other persons similarly situated, filed a lawsuit against        the Company for alleged unpaid overtime wages pursuant to the New York Labor Law. Plaintiff        seeks to certify a class of regular full-time hourly employees working within the State of        New York. The legal issues in this case are closely intertwined and connected to the legal        issues in the matter of Coke v. Long Island Care at Home, 376 F.3d 118 (2d Cir. 2004) which        involves the exemption for home health care aides under the Fair Labor Standards Act. On        August 31, 2006, upon a remand from the United States Supreme Court, the United States        Court of Appeals for the Second Circuit affirmed the decision of the United States District        Court for the Southern District of New York ruling that the exemption did not apply to home        health aides employed by third parties. This decision, however, was stayed        pending an appeal to the United States Supreme        Court. Because of thisappeal of the Cokedecision, the parties in the matter of Lerai        Jones, et al. v. National Home Health Care, entered into a stipulation extending the        defendant’s time to answer the complaint or agreeing to have plaintiff stipulate to a        discontinuance of this matter within thirty (30) days after a ruling in the Coke decision        by the United States Supreme Court. On June 11, 2007, the United States Supreme        Courtunanimouslyoverturnedthe decision of the United States Court of        Appeals for the Second Circuit and upheld the exemption from overtime wages for home health        aides. The Company is in the process of effectuating discontinuance of this        matter.

        On May 13, 2005, Accredited received a copy of a Petition for Certification of        Representative, pursuant to the provisions of the National Labor Relations Act. On March        21, 2006 the home health aides of Accredited, in a mail ballot election, rejected union        representation by SEIU 1199 New Jersey.

**Competition**

        The home health care field is highly competitive in each state in which the Company        operates. The Company is competing with numerous other licensed as well as certified home        health care agencies in each of the markets it serves. In addition, the Company competes        with companies that, in addition to providing home health aide and skilled nursing        services, also, unlike the Company, provide pharmaceutical products and other home health        care services that generate additional referrals. The Company believes it is one of the        largest competitors in the state of Connecticut. However, the Company believes that        numerous competitors in the other principal markets served by the Company (*i.e.,* the        states of Massachusetts, New York and New Jersey) have substantially greater personnel,        financial and other resources than the Company. Competition also involves the quality of        services provided and the pricing for such services. The Company’s largest        competitors include Gentiva Health Services, Inc., Premier Health Services, Patient Care,        Inc., New York Health Care, Inc. and Personal Touch Home Care, Inc. As a result of changes        in Medicare reimbursement and the competitive pressures of managed care, the home health        care industry continues to experience consolidation. In addition, the Company believes that        smaller, less financially secure home health agencies will continue to find it difficult to        compete for market share and comply with regulatory compliance standards.

        The Company’s ability to attract a staff of highly trained personnel is a material        element of its business. There currently is intense competition for qualified personnel and        there can be no assurance that the Company will be successful in maintaining or in securing        additional qualified personnel. The Company’s competition for personnel comes from        other industries as well. If and to the extent that reimbursement rates and other factors        constrain wages and other benefits to caregivers, other industries offering more attractive        compensation and other benefits also may attract eligible home health care personnel. The        Company recruits personnel principally through newspaper advertisements and through        referrals from existing personnel.

        -8-

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**Customers**

        The Company provides its services to four types of payer sources. These sources include        federal and state funded public assistance programs (Medicare and Medicaid), other third        party payers (subcontracts), insurance companies and private payers.

        A substantial portion of the Company’s revenue is derived from subcontracts that the        Company has with Medicare certified home health care agencies and long-term health care        provider programs that subcontract our caregivers. From time to time, some of these        agencies have requested bids from the home care agencies to which they subcontract. If the        Company is not successful in maintaining these contracts as they come up for bid, it could        have a materially adverse effect on the Company’s results of operations.

        For the fiscal years ended July 31, 2007, 2006 and 2005, the State of Connecticut        Department of Social Services Medicaid Program accounted for 27%, 27% and 28%,        respectively, of the Company’s net patient revenue and the New Jersey Department of        Human Services Division of Medical Assistance and Health Services Program accounted for        12%, 13% and 12%, respectively, of the Company’s net patient revenue. The loss of or        a significant adverse change in the business terms with either of the foregoing customers        would have a material adverse effect on the Company.

**Government Regulation and Licensing**

        The health care industry is highly regulated. The Company’s business is subject to        substantial and frequently changing regulations by federal, state and local authorities.        The Company must comply with state licensing along with federal and state eligibility        standards for certification as a Medicare and Medicaid provider. The ability of the Company        to operate profitably will depend in part upon the Company obtaining and maintaining all        necessary licenses and other approvals in compliance with applicable health care        regulations.

*The Health Insurance Portability and Accountability Act.* The Health Insurance        Portability and Accountability Act (“HIPAA”), enacted by the Federal government        on August 12, 1996, requires organizations to adhere to certain standards to protect data        integrity, confidentiality and availability. HIPAA mandates, among other things, that the        Department of Health and Human Services adopt standards for the exchange of electronic        health information in an effort to encourage overall administrative simplification and        enhance the effectiveness and efficiency of the health care industry. Organizations were        required to be in compliance with certain HIPAA provisions relating to security and privacy        beginning April 14, 2003. Organizations are subject to significant fines and penalties if        found not to be compliant with the provisions outlined in the regulations. Regulations        issued pursuant to HIPAA impose ongoing obligations relative to training, monitoring and        enforcement, and management has implemented processes and procedures to ensure continued        compliance with these regulations.

        -9-

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*Medicare.* Title XVIII of the Social Security Act authorizes Part A of the Medicare        program, the health insurance program that pays for home health care services for covered        persons (typically, those aged 65 and older and long-term disabled). Home health care        providers may participate in the Medicare program subject to certain conditions of        participation and upon acceptance of a provider agreement by the Secretary of Health and        Human Services. Only enumerated services, upon satisfaction of certain coverage criteria,        are eligible for reimbursement as a Medicare provider. The Company is currently Medicare        certified in Connecticut and Massachusetts. Approximately 4%, 4% and 6% of the        Company’s net patient revenue for the fiscal years ended July 31, 2007, 2006 and        2005, respectively, were derived from the Medicare program (see *“Risk Factors*        - *Risks Related to Federal and State        Regulations”*belowfor a discussion regarding the Company’s participation        in the Connecticut Medicare program).

*Medicare Fraud and Abuse.* Provisions of the Social Security Act under Medicare and        Medicaid generally prohibit soliciting, receiving, offering or paying, directly or        indirectly, any form of remuneration in return for the referral of Medicare or state health        care program patients or patient care opportunities, or in return for the purchase, lease        or order of any facility item or service that is covered by Medicare or a state health care        program. The federal government has published regulations that provide exceptions, or        “safe harbors,” for business transactions that will be deemed not to violate        the anti-kickback statute. Violations of the statute may result in civil and criminal        penalties and exclusion from participation in the Medicare and Medicaid programs. The        Company believes that its current operations are not in violation of the anti-kickback        statute.

*Medicaid.* Approximately 47%, 47% and 46% of the Company’s net patient revenue        for the fiscal years ended July 31, 2007, 2006 and 2005, respectively, were derived from        state sponsored Medicaid programs. Reimbursement for home health care services rendered to        eligible Medicaid recipients is made in an amount determined in accordance with procedures        and standards established by state law under federal guidelines. States differ as to        reimbursement policies and rates. The Company is a licensed Medicaid provider in        Connecticut, New Jersey, Massachusetts and in Nassau and Westchester Counties, New York.        Future Medicaid reimbursement rates may be reduced in response to state economic and        budgetary constraints, as well as in response to changes in the Medicare program (see        *“Risk Factors* - *Risks Related to Federal and        State Regulations”*below for a discussion        regarding the Company’s participation in the Connecticut Medicaid        program).

*Surveys*. From March 1, 2004 through August 23, 2005, the Division of Health Services        Regulation for the Connecticut Department of Public Health (the “DPH”)        conducted various licensing and certification inspections of New England. In December 2005,        New England and the DPH entered into a Consent Order for the purpose of resolving the        DPH’s findings at the conclusion of those inspections. The Consent Order provides for        the adoption of certain policies and procedures pursuant to a Plan of Correction approved        by the DPH. The terms of the Consent Order will generally remain in effect until the fall        of 2007*.* A failure by New England to achieve Medicare certification would result in        New England’s termination from participation in the Medicare and Medicaid programs.        Revenues derived from New England’s participation in these programs for the fiscal        year ended July 31, 2007 were 29% of the Company’s net patient revenues.

*Audit*. In August 2005, the Connecticut Department of Social Services, Office of        Quality Assurance (the “Department”) performed an audit of Medical Assistance        claims paid to New England covering the period April 1, 2003 through March 31, 2005. The        audit included a review of relevant claim information maintained by the Department and a        review of the appropriate medical and administrative records maintained by New England. New        England received approximately $53,000,000 in reimbursement during the audit period. In        October 2006, the Company received the results of the audit, which resulted in a liability        of $151,000 to the Department.

        -10-

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| **Item 1A.     ** | ****
**Risk Factors** |
|--------------------------------------------|-----------------------|

        This section summarizes certain risks, among others, that should be considered by        stockholders and prospective investors in the Company. Many of these risks are also        discussed in other sections of this report.

*Risks Related to the Company’s Ability to Attract Qualified Caregivers.*

        The Company relies significantly on its ability to attract and retain caregivers who        possess the skills, experience and licenses necessary to meet the requirements of the        Company’s customers. The Company competes for home health care services personnel        with other providers of home health care services. The Company must continually evaluate        and expand its network of caregivers to keep pace with its customers’ needs.        Currently, there is a shortage of qualified nurses and a diminishing pool of home health        aides in the states in which the Company conducts its business, competition for nursing        personnel is increasing and wages and benefit costs have risen. The Company may be unable        to continue to increase the number of caregivers that it recruits, adversely affecting the        potential for growth of the Company’s business. The Company’s ability to        attract and retain caregivers depends on several factors, including the Company’s        ability to provide such caregivers with assignments that they view as attractive and with        competitive wages and benefits. There can be no assurance that the Company will be        successful in any of these areas. The cost of attracting caregivers and providing them with        attractive benefit packages may be higher than the Company anticipates and, as a result, if        it is unable to obtain increased reimbursement rates, the Company’s profitability        could decline. Moreover, if the Company is unable to attract and retain caregivers, the        quality of its services to its customers may decline and, as a result, it could lose        certain customers.

*Risks Related to Collective Bargaining.*

        Effective July 1, 2007, Allen Health Care and District Council 1707, AFSCME concluded        negotiations on a new three-year labor contract. The Company is unable to estimate how        future negotiations will affect the Company’s future results of operations or        financial condition. On May 13, 2005, Accredited received a copy of a Petition for        Certification of Representative, pursuant to the provisions of the National Labor Relations        Act. Although on March 21, 2006, the home health aides of Accredited, in a mail ballot        election, rejected union representation by SEIU 1199 New Jersey, there can be no assurance        that further unionizing activity will not occur at this or other subsidiaries of the        Company or that any such activity or any new collective bargaining agreements will not have        a material adverse effect on the Company.

*Risks Related to Competition.*

        The home health care business is highly competitive. Some of the Company’s        competitors, unlike the Company, provide pharmaceutical products and other home health care        services that generate additional referrals. Some of the Company’s competitors also        may have greater marketing and financial resources than the Company. The Company believes        that the primary competitive factors in obtaining and retaining customers are the quality        of services provided and the pricing of such services. Competition for referrals may        increase in the future and, as a result, the Company may not be able to remain competitive.        To the extent competitors gain or retain market share by reducing prices or increasing        marketing expenditures, the Company could lose market share or otherwise experience a        material adverse effect. The Company does not have long-term agreements or exclusive        guaranteed order contracts with its customers. The success of the Company’s business        is dependent upon its ability to continually secure new business from its customers and to        service such new business with its caregivers. The Company’s customers are free to        seek services from the Company’s competitors and to use caregivers that such        competitors offer them. Therefore, the Company must maintain positive relationships with        its customers; otherwise, the Company may be unable to generate new business for its        caregivers, which could have a material adverse effect on the Company.

        -11-

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*Risks Related to Medicaid Retroactive Adjustments and Recoupments.*

        New England, as a Connecticut Medicaid provider, is subject to retroactive adjustments due        to prior year audits, reviews and investigations, government fraud and abuse initiatives        and other similar actions. Federal regulations also provide for withholding payments to        recoup amounts payable under the Medicaid program. While the Company believes it is in        material compliance with applicable Medicaid reimbursement regulations, there can be no        assurance that the Company, pursuant to such audits, reviews and investigations, among        other things, will be found to be in compliance in all respects with such reimbursement        regulations. A determination that the Company is in violation of any such reimbursement        regulations could result in retroactive adjustments and        recoupments and have a material adverse effect on the Company. As a Medicaid provider, the        Company is also subject to routine, unscheduled audits, which may have an adverse        impact on the Company’s results of operations. For information on a recent audit        performed by the Connecticut Department of Social Services, Office of Quality Assurance,        see “Government Regulation and Licensing – Audit.”

*Risks Related to Federal and State Regulations.*

        The Company is subject to substantial and frequently changing federal,        state and local regulations. The Company must also        comply with state licensing along with federal and state eligibility standards for        certification as a Medicare and Medicaid provider. In addition, new laws and regulations        are adopted periodically to regulate new and existing services in the health care industry.        Changes in laws or regulations or new interpretations of existing laws or regulations can        have a dramatic effect on operating methods, costs and reimbursement amounts provided by        government and other third-party payers. Federal laws governing the Company’s        activities include regulation of Medicare reimbursement and certification and certain        financial relationships with health care providers (collectively, the “fraud and        abuse laws”). Although the Company intends to comply with all applicable federal and        state fraud and abuse laws, these laws are not always clear and may be subject to a range        of potential interpretations. (For further discussion on such fraud and abuse laws, see        “Government Regulation and Licensing – Medicare Fraud and Abuse.”) There        can be no assurance that administrative or judicial clarification or interpretation of        existing laws or regulations, or legislative enactment of new laws or regulations, will not        have a material adverse effect on the Company. In addition, the Balanced Budget Act of        1997, as amended (the “Balanced Budget Act”), introduced several government        initiatives causing changes to Medicare reimbursement. These changes have resulted in the        Company experiencing a decline in revenue from its Medicare certified subsidiary in        Connecticut. (For further discussion on the Balanced Budget Act, see “Government        Regulation and Licensing – Medicare.”)

        -12-

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        New England, as a participant in the State of Connecticut Department of Social Services        Medicaid program, is subject to survey and audits of operational, clinical and financial        records with respect to proper applications of general regulations governing operations and        billing of claims. These audits can result in retroactive adjustments for payments received        from this program. There can be no assurance that federal, state or local governments will        not change existing standards or impose additional standards. Any failure to comply with        existing or future standards could have a material adverse effect on the Company. For        information as to surveys of New England conducted by DPH, see “Government Regulation        and Licensing – Surveys.” A failure by New England to retain Medicare        certification would result in New England’s termination from participating in the        Medicare and Medicaid programs. Revenues derived from New England’s participation in        these programs for the fiscal year ended July 31, 2007 were 29% of the Company’s net        patient revenues.

*Risks Related to the Company’s Exposure to Professional Liabilities.*

        Provision of home health care services entails an inherent risk of liability. Certain        participants in the home health care industry may be subject to lawsuits that may involve        large claims and significant defense costs. It is expected that the Company periodically        will be subject to such suits as a result of the nature of its business. The Company        currently maintains professional liability insurance intended to cover such claims in        amounts which management believes are in accordance with industry standards. There can be        no assurance that the Company will be able to obtain liability insurance coverage in the        future on acceptable terms, if at all. There can be no assurance that claims in excess of        the Company’s insurance coverage or claims not covered by the Company’s        insurance coverage will not arise. A successful claim against the Company in excess of the        Company’s insurance coverage could have a material adverse effect on the Company.        Claims against the Company, regardless of their merit or eventual outcome, may also have a        material adverse effect on the Company’s ability to attract customers or to expand        its business. In addition, one of the Company’s subsidiaries is self-insured for its        workers compensation and is at risk for claims up to certain levels.

*Risks Related to Third Party Payers.*

        For the twelve months ended July 31, 2007, 2006 and 2005, the percentage of the        Company’s net patient revenues derived from Medicare and Medicaid was 50%, 51% and        51%, respectively. The revenues and profitability of the Company are affected by the        continuing efforts of all third-party payers to contain or reduce the costs of health care        by lowering reimbursement rates, narrowing the scope of covered services, increasing case        management review of services and negotiating reduced contract pricing. Any changes in        reimbursement levels under Medicare, Medicaid or other payer sources and any changes in        applicable government regulations could have a material adverse effect on the Company. See        Item 7 – “Management’s Discussion and Analysis of Financial Condition and        Results of Operations -- Certain Trends Expected to Impact Future Results of        Operations.” Changes in the mix of the Company’s patients among Medicare,        Medicaid and other payer sources may also affect the Company’s revenues and        profitability.

        -13-

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*Risks Related to the Company’s Acquisition Strategy.*

        In recent years, the Company’s strategic focus has been on the acquisition of small        to medium sized home health care agencies, or of certain of their assets, in targeted        markets. These acquisitions involve significant risks and uncertainties, including        difficulties integrating acquired personnel and other corporate cultures into the        Company’s business, the potential loss of key employees or customers of acquired        companies, the assumption of liabilities and exposure to unforeseen liabilities of acquired        companies and the diversion of management attention from existing operations. The Company        may not be able to fully integrate the operations of the acquired businesses with its own        in an efficient and cost-effective manner. The failure to effectively integrate any of        these businesses could have a material adverse effect on the Company. In addition, the        Company’s growth over the last several years has principally resulted from        acquisitions and penetration of markets abandoned by competitors. There can be no assurance        that the Company will be able to identify suitable acquisitions or available market share        in the future nor that any such opportunities, if identified, will be consummated on terms        favorable to the Company, if at all. In the absence of such successful transactions, there        can be no assurance that the Company will experience further growth, nor that such        transactions, if consummated, will result in further growth.

In addition, although the Company attempted in its        acquisitions to determine the nature and extent of any pre-existing liabilities, and has        obtained indemnification rights from the previous owners for acts or omissions arising        prior to the date of the acquisition, resolving issues of liability between the parties        could involve a significant amount of time, manpower and expense on the part of the        Company. If the Company or any of its subsidiaries were to be unsuccessful in a claim for        indemnity from a seller, the liability imposed on the Company or its subsidiary could have        a material adverse effect on the Company.

        The Company has grown significantly over the past few years. This growth, which has        resulted primarily from acquisitions and which management intends to continue to pursue,        poses a number of difficulties and risks for the        Company. As the Company has grown and may continue to        grow (as to which there can be no assurance) in both revenue and geographical scope, such        growth stretches the various resources of the Company, including management, information        systems, regulatory compliance, logistics and other controls. There can be no assurance        that such resources will keep pace with such growth. If the Company does not maintain such        pace, then its prospects would be materially adversely affected.

*Risks Related to the Company’s Dependence on Senior Management.*

        The Company believes that the success of its business strategy and its ability to operate        profitably depends on the continued employment of its senior management team. If any member        of the Company’s senior management team becomes unable or unwilling to continue in        his present position, the Company’s business and financial results could be        materially adversely affected.

| **Item 1B.** | ****Unresolved** Staff Comments.** |
|--------------|------------------------------------|

        None.

        -14-

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| **Item 2.** | ****Properties**.** |
|-------------|---------------------|

        The Company, directly or through certain subsidiaries, leases various office facilities        under lease agreements with various expiration dates through fiscal 2013. The following        sets forth the location, approximate square footage and use of each office, and the        expiration date of each lease:

| Location            | ApproximateSquare Feet               | Use                    | Expiration Date of Lease |
|---------------------|--------------------------------------|------------------------|--------------------------|
| Scarsdale, NY       |      2,679  | Corporate headquarters | October 31, 2008         |
| Queens, NY          |      12,300 | Administrative office  | July 31, 2008            |
| Hempstead, NY       |      2,500  | Branch office          | April 30, 2009           |
| Mount Vernon, NY    |      650    | Satellite office       | April 30, 2009           |
| Brooklyn, NY        |      1,083  | Satellite office       | December 31, 2007        |
| Bronx, NY           |      960    | Satellite office       | May 31, 2009             |
| Cromwell, CT        |      18,044 | Administrative office  | June 30, 2008            |
| New Haven, CT       |      6,670  | Branch office          | April 30, 2012           |
| Waterbury, CT       |      3,986  | Branch office          | Month-to-Month           |
| West Hartford, CT   | 4,455                                | Branch office          | January 31, 2009         |
| Shelton, CT         | 1,826                                | Branch office          | October 31, 2012         |
| Norwich, CT         | 700                                  | Satellite office       | Month-to-Month           |
| Hackensack, NJ      |   4,281                    | Administrative office  | September 30, 2008       |
| Union City, NJ      | 700                                  | Satellite office       | Month-to-Month           |
| East Orange, NJ     | 3,000                                | Branch office          | September 30, 2009       |
| Jersey City, NJ     | 442                                  | Satellite office       | April 30, 2008           |
| Toms River, NJ      | 1,200                                | Branch office          | August 31, 2010          |
| Paterson, NJ        | 1,250                                | Satellite office       | November 30, 2008        |
| Newton, MA          | 3,838                                | Administrative office  | August 31, 2010          |
| Bellingham, MA      | 355                                  | Satellite office       | April 30, 2009           |
| North Andover, MA   | 220                                  | Satellite office       | July 31, 2008            |
| Framingham, MA      | 525                                  | Satellite office       | Month-to-Month           |
| Boston, MA          | 780                                  | Satellite office       | April 30, 2008           |
| Lynn, MA            | 412                                  | Satellite office       | Month-to-Month           |
| North Dartmouth, MA | 964                                  | Satellite office       | January 31, 2008         |
| Chicopee, MA        | 1,340                                | Satellite office       | November 30, 2007        |
| North Easton, MA    | 550                                  | Satellite office       | Month-to-Month           |
| Leominster, MA      | 1,000                                | Satellite office       | Month-to-Month           |
| Worcester, MA       | 1,913                                | Branch office          | April 14, 2010           |

        -15-

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        The Company believes that its office facilities are adequate for the conduct of its        existing operations. The Company regularly evaluates the suitability and the overall        adequacy of its various offices. The Company believes that it will be able to either (i)        renew any leases that will expire during the current fiscal year or (ii) find adequate        leases in lieu of any leases that have expired or will expire during the current fiscal        year.

|  | **Item 3.** | ****Legal Proceedings**.** |
|--|-------------|----------------------------|

        On February 28, 2006, Lerai Jones, individually and on behalf of all other persons        similarly situated, filed a lawsuit against the Company for alleged unpaid overtime wages        pursuant to the New York Labor Law. Plaintiff seeks to certify a class of regular full-time        hourly employees working within the State of New York. The legal issues in this case are        closely intertwined and connected to the legal issues in the matter of Coke v. Long Island        Care at Home 376 F.3d 118 (2d Cir. 2004), which involves the exemption for home health care        aides under the Fair Labor Standards Act. On August 31, 2006, upon a remand from the United        States Supreme Court, the United States Court of Appeals for the Second Circuit affirmed        the decision of the United States District Court for the Southern District of New York        ruling that the exemption did not apply to home health aides employed by third parties.        This decision, however, was stayed pending an appeal to the United States Supreme Court.        Because of this appeal of the Coke decision, Jones and the Company entered into a        stipulation extending the defendant’s time to answer the complaint or agreeing to        have plaintiff stipulate to a discontinuance of this matter within thirty (30) days after a        ruling in the Coke decision by the United States Supreme Court. On June 11, 2007, the        United States Supreme Court unanimously overturned the decision of the United States Court        of Appeals for the Second Circuit and upheld the exemption from overtime wages for home        health aides. The Company is in the process of effectuating discontinuance of this        matter.

        -16-

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        On October 3, 2006, the Company’s New York subsidiary received an Information        Subpoena with Restraining Notice by certified mail in connection with a Judgment obtained        by Ida Faulkner against the New York subsidiary in the amount of $2,149,180 entered on        default on January 4, 2005 in the Supreme Court of New York, Bronx County. The Company had        no prior knowledge of Ms. Faulkner’s action, nor of the entry of the default. Upon a        review of the Court’s file, the Company has ascertained that the action was commenced        on or about August 21, 2003 and service of the Summons and Verified Complaint was made at        an incorrect address. All subsequent notices were sent to this incorrect address and were        not received by the Company. The Verified Complaint asserted causes of action for        negligence and breach of contract and alleged that Ms. Faulkner suffered unspecified        personal injuries. On October 6, 2006, the Company moved by Order to Show Cause to vacate        the default based upon its lack of notice of the Summons and Verified Complaint. By        Stipulation dated January 29, 2007, the default was vacated and the action was restored to        the court’s active calendar. On February 8, 2007 the Company served an Answer        asserting numerous defenses to the Verified Complaint. The parties are currently engaged in        discovery. The Company believes that the claims are without merit and are fully covered by        insurance.

        On November 17, 2006, Americare at Home, Inc. brought an action against Medical Resources        Home Health Corp. (“MRHHC”), a subsidiary of the Company, and certain others,        in the Superior Court of the Commonwealth of Massachusetts. The plaintiff alleges that        there was an existing contract between it and defendant Psychiatric Home Care, Inc.        (“PHC”) and that MRHHC entered into a contract with PHC tortiously interfering        with such contract and interfering with an advantageous relationship. Plaintiff seeks        damages of approximately $573,000 against all of the defendants. MRHHC has answered the        complaint, denied all of the allegations contained therein and is vigorously defending the        claims. The Company cannot predict the ultimate resolution of this matter or the total        amount of legal fees or other expenses to be incurred in connection with this matter.

        On January 19, 2007, Helaba Invest Kapitalanlagegesellschaft mbH filed a verified class        action complaint in the Delaware Court of Chancery (the “Class Action        Complaint”). The suit purportedly was filed on behalf of the “public        shareholders of the Company.” The Class Action Complaint names as defendants the        Company and the individual members of its board of directors. In the Class Action        Complaint, the plaintiff challenges the Merger Agreement (See Note 10) and seeks a        declaration that the defendants, and each of them, have committed or participated in a        breach of their fiduciary duties of loyalty, good faith and care to the Company’s        minority, public stockholders by approving the merger, and causing the Company to enter        into the Merger Agreement. The plaintiff in the Class Action Complaint seeks preliminary        and permanent injunctive relief preventing the consummation of the transaction, or in the        alternative, if the transaction is consummated, rescission of the transaction. In the Class        Action Complaint, the plaintiff alleged, among other things, that the initial Merger        Consideration of $11.35-$11.50 per Common Share was inadequate; that the break up fee in        the Merger Agreement is excessive and discourages other potentially superior offers for the        Company; that two of the directors, the largest individual stockholders of the Company,        have executed voting agreements requiring them to vote in favor of the transaction; and        that certain terms of the transaction provide financial benefits to management and inside        directors that create conflicts of interest. The defendants filed answers on or about        February 13, 2007, denying the material allegations of the Class Action Complaint.        Plaintiff’s motion for a preliminary injunction enjoining the transaction was denied        by the Court. The parties have agreed in principle to a settlement of the lawsuit in        exchange for an additional payment of $0.10 per share in cash to all shareholders of the        Company other than the directors and officers of the Company and their families. The        additional payment of $0.10 per share in connection with the merger will be paid by AG Home        Health Acquisition Corp., a Delaware corporation.  If the merger is not completed, no        payment will be made.  On October 18, 2007 counsel for the parties executed a        memorandum of understanding with respect to the settlement.  (See Note 8).  The        settlement is subject to reaching an agreement on the language of a stipulation of        settlement, in which the Company will reserve its rights to object to any fee application        made by plaintiff’s counsel, and conditioned upon additional discovery by plaintiff.        If a stipulation of settlement is signed, the Court will hold a hearing to consider whether        to certify the class and approve the settlement. It is anticipated that it will take        approximately 90 days after the appropriate notification procedures to occur.

        -17-

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|  | **Item 4.** | ****Submission of Matters** to a Vote of                    Security Holders.** |
|--|-------------|---------------------------------------------------------------------------------|

        A special meeting of stockholders of the Company was held on June 15, 2007. At such meeting        stockholders approved and adopted the Amended Merger Agreement, dated as of June 4, 2007,        among the Company and affiliates of Angelo Gordon & Co. An aggregate of 3,282,070        shares were cast for the proposal, an aggregate of 1,327,318 shares were cast against the        proposal and 6,583 shares abstained from voting. There were no broker non-votes. In        addition, on May 17, 2007 and May 29, 2007, special meetings of the stockholders of the        Company were also held. The only action taken at each such meeting was to adjourn it. The        votes at such meetings were as follows:

|           | For       | Against   | Abstain | Broker Non-Votes |
|----------------|-----------|-----------|---------|------------------|
| May 17 meeting | 2,653,468 | 1,304,513 | 3,108   | -                |
| May 29 meeting | 2,653,468 | 1,304,513 | 3,108   | -                |

|  | **PART II** |  |
|--|-------------|--|

| **Item 5.** | ****Market for Registrant’s**                    Common Equity, Related Stockholder Matters and Issuer Purchases of Equity                    Securities.** |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (a)      | Market Information |
|-----------------------------------|--------------------|

        The Company’s Common Stock is quoted on the NASDAQ National Market under the symbol        NHHC. The following table presents the quarterly high and low bid quotations in the        over-the-counter market, as reported by the National Association of Securities Dealers for        the two fiscal years ended July 31, 2007 and 2006. These quotations reflect the        inter-dealer prices, without retail mark-up, mark-down or commission and may not        necessarily represent actual transactions.

|                                                        | FirstQuarter       | SecondQuarter      | ThirdQuarter       | FourthQuarter      |
|-------------------------------------------------------------|--------------------|--------------------|--------------------|--------------------|
|                                                        |               |               |               |               |
|      2007                               |               |               |               |               |
|           High | $ 11.15            | $ 12.30            | $ 14.05            | $ 13.13            |
|           Low  | $   9.65 | $ 10.19            | $ 10.93            | $ 11.55            |
|      2006                               |               |               |               |               |
|           High | $ 12.78            | $ 11.46            | $ 11.40            | $ 10.35            |
|           Low  | $   9.00 | $   9.19 | $   9.41 | $   8.80 |
| Dividends per share of common stock:                        |               |               |               |               |
|      2007                               | $ 0.075            | $ 0.075            | $ 0.075            | $ 0.075            |
|      2006                               | $ 0.075            | $ 0.075            | $ 0.075            | $ 0.075            |

-18-

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| (b)      | Holders |
|-----------------------------------|---------|

        There were approximately 81 holders of record of the Company’s Common Stock as of        October 26, 2007, excluding certain beneficial holders that own their shares in street        name, but including each firm which holds shares on behalf of such beneficial owners.

| (c)      | Securities Authorized for Issuance Under Equity Compensation Plans. |
|-----------------------------------|---------------------------------------------------------------------|

| Plan Category                                                                 | Number of Securities to be Issued Upon Exercise                    of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding                    Options, Warrants and Rights | Number of Securities Remaining Available for                    Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected                    in Column (a)) |
|-------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                          | (a)                                                                                                            | (b)                                                                                            | (c)                                                                                                                                                                               |
| Equity compensation plans approved by security                    holders     | 215,533                                                                                                        | $7.97                                                                                          | 200,707                                                                                                                                                                           |
|                                                                          |                                                                                                           |                                                                                           |                                                                                                                                                                              |
| Equity compensation plans not approved by                    security holders | N/A                                                                                                            | N/A                                                                                            | N/A                                                                                                                                                                               |
|                                                                          |                                                                                                           |                                                                                           |                                                                                                                                                                              |
| **Total**                                                                     | 215,533                                                                                                        | $7.97                                                                                          | 200,707                                                                                                                                                                           |

        -19-

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| **Item 6.** | ****Selected Financial Data**.** |
|-------------|----------------------------------|

|                                                                                           | Fiscal Years Ended July 31,                                                           |
|------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                                                           | 2007                                                                                  | 2006 | 2005 | 2004 | 2003 |
| STATEMENT OF OPERATIONS DATA:                                                                  |                                                                                  |   |   |   |   |
| Revenue                                                               | $110,809,000                                                                          | $102,365,000 | $98,461,000 | $94,592,000 | $97,235,000 |
| Operating                    expenses                                 | 104,932,000                                                                           | 96,821,000 | 93,090,000 | 86,975,000 | 87,694,000 |
| Income from                    operations                             | 5,877,000                                                                             | 5,544,000 | 5,371,000 | 7,617,000 | 9,541,000 |
| Other income:                                                                                  |                                                                                  |   |   |   |   |
| Interest                    income................                    | 906,000                                                                               | 531,000 | 275,000 | 143,000 | 143,000 |
| Income before income                    taxes                         | 6,783,000                                                                             | 6,075,000 | 5,646,000 | 7,760,000 | 9,684,000 |
| Provision for income                    taxes                         | 3,835,000                                                                             | 2,420,000 | 2,079,000 | 3,040,000 | 3,901,000 |
| Net                    income                                         | $    2,948,000                                                    | $ 3,655,000 | $ 3,567,000 | $ 4,720,000 | $ 5,783,000 |
| Primary net income per shareof common                    stock        | $           0.52               | $                           0.65 | $        0.63 | $                           0.85 | $                            1.04 |
| Diluted net income per share

of common                    stock      | $                              0.51 | $                           0.64 | $                           0.62 | $                           0.83 | $                            1.01 |
| Dividends declared per                    share                       | $                              0.30 | $                           0.30 | $                           0.30 | $                                - | $                                 - |

|                                                                        | At July 31, |
|-----------------------------------------------------------------------------|-------------|
|                                                                        | 2007        | 2006 | 2005 | 2004 | 2003 |
| BALANCE SHEET DATA:                                                         |        |   |   |   |   |
| Total                    assets                    | $60,654,000 | $57,764,000 | $55,600,000 | $53,486,000 | $48,473,000 |
| Working                    capital                 | 37,461,000  | 35,578,000 | 32,729,000 | 35,169,000 | 29,551,000 |
| Retained                    earnings               | 31,421,000  | 30,172,000 | 28,216,000 | 26,342,000 | 21,622,000 |
| Stockholders’                    equity      | 54,112,000  | 52,863,000 | 50,922,000 | 49,039,000 | 43,866,000 |

-20-

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|  | **Item 7.** | ****Management’s Discussion** and                    Analysis of Financial Condition and Results of Operations.** |
|--|-------------|-------------------------------------------------------------------------------------------------------------------------|

**General**

        The following discussion and analysis provides information which the Company’s        management believes is relevant to an assessment and understanding of the Company’s        results of operations and financial condition. This discussion should be read in        conjunction with the consolidated financial statements and notes appearing elsewhere        herein.

        The Company is subject to external factors that could significantly impact its business,        including potential reductions in reimbursement rates by Medicare, Medicaid and other third        party payers for the Company’s services, retroactive adjustments due to prior year        audits, reviews and investigations, government fraud and abuse initiatives and other such        factors that are beyond the control of the Company. These factors could cause future        results to differ materially from historical results.

        As a Medicaid provider in Connecticut, the Company is subject to routine, unscheduled        audits. These audits may result in the application of a statistically-derived adjustment        factor to the Company’s revenues, which may have an adverse impact on the        Company’s results of operations. In August 2005, the Company’s operations in        Connecticut for the period of April 1, 2003 through March 31, 2005 were audited. During the        audit period, the Company received approximately $53,000,000 in reimbursement. The audit        resulted in a claim being made by the Connecticut Department of Social Services        (“DSS”) in the amount of approximately $151,000 in October 2006. There can be        no assurance that future Medicaid audits will not have a material adverse impact on the        Company.

**The Impact of the Balanced Budget Act**

        The Balanced Budget Act was signed into law in August 1997. The Act made significant        changes in the reimbursement system for Medicare home health care services. The primary        change affecting the Company was a restructuring of the reimbursement system related to        Medicare certified home health care agencies. Prior to the Act, Medicare reimbursed        providers on a reasonable cost basis subject to program-imposed cost per visit        limitations.

        Under the Act, changes in Medicare home care reimbursement were scheduled in two phases. A        temporary or interim payment system (“IPS”) took effect for cost reports        beginning on or after October 1, 1997. Under IPS, home health care providers were        reimbursed the lowest of (i) their actual costs, (ii) cost limits based on 105% of median        costs of freestanding home health agencies, or (iii) an agency-specific per patient cost        limit, based on 1994 costs adjusted for inflation. Under IPS, most Medicare providers were        actually reimbursed under an agency-specific per patient cost limit. Effective October 1,        2001, under the prospective payment system, Medicare now reimburses providers a        predetermined base payment. The payment is adjusted for the health condition and care needs        of the beneficiary and is also adjusted for geographic differences in wages across the        country. Medicare provides home health agencies with payments for 60-day “episodes of        care.”

        -21-

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        The final phase of the Act implemented a 15% cut in Medicare reimbursement rates effective        October 1, 2002. In two of the last three fiscal years, less than five percent of the        Company’s net patient revenue was derived directly from Medicare, and accordingly the        change to the prospective payment system has not, to date, had a material adverse impact on        the Company. However, there can be no assurance that the Medicare prospective payment        system will not adversely impact the Company’s reimbursement rates in the future or        otherwise have a material adverse effect on the Company. The Company’s operations in        New York are dependent upon referrals, primarily from Medicare certified home health care        agencies, whose reimbursement has been affected by the prospective payment system. Under        the prospective payment system, there can be no assurance that the Company’s future        referrals will not result in reduced reimbursement rates or reduced volume of business.

**Recent Acquisitions**

        The following acquisitions were made through a wholly owned subsidiary of the Company.        These acquisitions complemented the existing business of the Company in the geographical        area in which the entity whose assets were acquired provided services. Each of the        acquisitions described below was accounted for utilizing purchase accounting principles. At        the time of its acquisition, the revenues of each acquired business constituted less than        ten percent of the consolidated revenues of the Company.

        On May 22, 2005, the Company acquired through Accredited certain assets of Helping Hands, a        licensed home health care company in the state of New Jersey that provided home health aide        services in Bergen, Hudson, Passaic, Essex, Morris, Union, Middlesex, Somerset and Ocean        Counties, New Jersey.

        On October 6, 2004, the Company acquired through New England certain assets of On Duty        Metropolitan Connecticut, LLC, a Medicare certified and State licensed home health care        company that provided nursing and home health care services in New Haven and Fairfield        Counties, Connecticut.

**Critical Accounting Policies**

        The Company believes that the most critical accounting policies used in the preparation of        its consolidated financial statements are those policies relating to recognizing net        patient revenue, determining the value of accounts receivable, and assessing the value of        goodwill and other long-lived assets.

*Net Patient Revenue*. The Company recognizes net patient revenue generally on the        date services are provided to patients. Net patient revenue is recorded at amounts the        Company expects to receive under reimbursement arrangements with third-party payers,        including private insurers, private payers, subcontractors, Medicaid and Medicare. Because        the Company’s business depends upon third-party payers whose reimbursement rates and        payment policies are complex and subject to possible change from time to time, the Company        must make estimates with respect to certain amounts it records as the net realizable value        of net patient revenue and accounts receivable. Because of the potential for changes in        these third-party reimbursement rates and payment policies, and as a result of the        complexity of certain of these policies, the estimated amounts originally recorded as net        patient revenue and accounts receivable may be subject to revision as additional        information becomes known.

        -22-

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*Accounts Receivable*. Accounts receivable are reduced by an allowance for possible        losses that provides a reserve with respect to those accounts for which net patient revenue        was recognized but with respect to which management subsequently determines that payment is        not expected to be received. The Company analyzes the balances of accounts receivable to        ensure that the recorded amounts properly reflect the amounts expected to be collected.        This analysis involves the application of varying percentages to each accounts receivable        category based on the age and the collectibility of the receivable. The result of this        aging analysis provides the initial estimate of the amount of uncollectible accounts        receivable. The amount ultimately recorded as the reserve is determined after management        also analyzes the collectibility of specific large or problematic accounts on an individual        basis, as well as the overall business climate and other factors. The Company’s        estimate of the percentage of uncollectible accounts may change from time to time and any        such change could have a material impact on the Company’s financial condition and        results of operations.

*Goodwill and Other Long-Lived Assets*. Goodwill arising from the acquisitions of        businesses is recorded as the excess of the purchase price over the estimated fair value of        the net assets of the businesses acquired. Statement of Financial Accounting Standards No.        142 (“Goodwill and Other Intangible Assets”) provides that goodwill is to be        tested for impairment annually, or more frequently if circumstances indicate potential        impairment. Consistent with this standard, the Company reviews goodwill, as well as other        intangible assets and long-term assets, for impairment annually or more frequently as        warranted, and if circumstances indicate that the recorded value of any such other asset is        impaired, such asset is written down to its proper value. The Company currently does not        believe any impairment of its goodwill or any such other asset existed at July 31, 2007.        Nevertheless, future conditions or events could adversely affect the recorded value of        goodwill or such other assets. If any item of goodwill or such other asset is determined to        be impaired, an impairment loss would be recognized equal to the amount by which the        recorded value exceeds the estimated fair market value.

**Results of Operations**

| (% of net patient revenue)    | **Fiscal year ended July 31,**                           |
|-------------------------------|----------------------------------------------------------|
|                          | **2007**                                                 | **2006** | **2005** |
| Net patient revenue           | 100.0%                                                   | 100.0% | 100.0% |
| Cost of revenue               | 66.8                                      | 66.7    | 66.1    |
| General and administrative    | 26.5                                      | 27.0    | 26.6    |
| Allowance for possible losses | 1.1                                       | .5    | 1.3    |
| Amortization of intangibles   |       .3    |       .4    |       .5    |
| Total operating expenses      | 94.7                                      | 94.6    | 94.5    |
| Income from operations        | 5.3                                       | 5.4    | 5.5    |
| Interest income               |       .8    |       .5    |         .2    |
| Income before income taxes    | 6.1                                       | 5.9    | 5.7    |
| Provision for income taxes    |     3.5               |     2.4    |     2.1    |
| Net income                    |     2.6%                             |     3.5% |     3.6% |

         

        -23-

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        Certain Factors Expected to Impact Future Results of Operations

        Allen Health Care and District Council 1707, American Federation of State, County and        Municipal Employees concluded negotiations on a new three-year labor contract that became        effective July 1, 2007. The previous labor agreement expired on April 30, 2007. This new        labor contract provides “covered” home health aides with some additional        benefits, consisting of an immediate wage increase, an increase in minimum hourly base        rates, a bonus program and holiday premium pay. The Company does not believe that the labor        contract will have a material adverse effect on the Company’s future result of        operations or financial condition.

        From March 1, 2004 through August 23, 2005, the DPH conducted various licensing and        certification inspections of New England. In December 2005, New England and the DPH entered        into a Consent Order for the purpose of resolving the DPH’s findings at the        conclusion of those inspections. The Consent Order provides for the adoption of certain        policies and procedures pursuant to a Plan of Correction approved by the DPH. The terms of        the Consent Order will generally remain in effect until the fall of 2007.

        In December 2004, New York State adopted legislation to increase the State minimum wage        from $5.15 per hour to $7.15 per hour over a two-year period. The law increased the minimum        wage to $6.00 per hour starting January 1, 2005. The minimum wage was raised to $6.75 per        hour on January 1, 2006 and was raised again to $7.15 per hour on January 1, 2007. This        minimum wage legislation has impacted the Company’s New York operations on two        fronts. Firstly, the Company will be paying higher base wages and secondly, overtime in New        York is computed at 1.5 times the state minimum wage, thus increasing costs to the        Company.

        On May 13, 2005, Accredited received a copy of a Petition for Certification of        Representative, pursuant to the provisions of the National Labor Relations Act. On March        21, 2006 the home health aides of Accredited, in a mail ballot election, rejected union        representation by SEIU 1199 New Jersey.

        On July 1, 2005, the State of New Jersey Medicaid Program introduced a revised Personal        Care Assistant (“PCA”) Beneficiary Assessment Tool (the “Tool”).        The Tool is used to determine the weekly hours a PCA Beneficiary receives. As a result of        the implementation of the Tool, Accredited has experienced and will continue to experience        a reduction in the amount of total hours per week that each PCA Beneficiary receives. For        the fiscal year ended July 31, 2007, the State of New Jersey Medicaid Program accounted for        approximately 80% of Accredited’s revenue.

        -24-

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        On May 9, 2007, the Company, AG Home Health Acquisition Corp., a Delaware corporation (the        “Acquisition Corp”), and AG Home Health LLC, a Delaware limited liability        company (the “Parent”) entered into an Amended and Restated Agreement and Plan        of Merger, (the “Merger Agreement”). On June 4, 2007, the Company, the        Acquisition Corp and the Parent entered into Amendment No. 1, to the Merger Agreement (the        Merger Agreement, as so amended, the “Amended and Restated Merger Agreement”).        On August 30, 2007, the Company, the Acquisition Corp. and the Parent extended until        November 21, 2007 the Amended and Restated Merger Agreement (the “Amended Merger        Agreement”). Pursuant to the Amended Merger Agreement and subject to the conditions        set forth therein, the Acquisition Corp will merge with and into the Company, with the        Company continuing as the surviving corporation under the laws of the State of Delaware.        The Parent is an affiliate of Angelo, Gordon & Co.

        At the effective time and as a result of the merger, each share of the Company’s        common stock, par value $.001 per share (each a "Common Share") issued and outstanding        immediately prior to the effective time will be cancelled, extinguished and converted into        the right to receive $12.75 per share, payable in cash (the “Merger        Consideration”). Pursuant to a separate agreement among the Company, the Acquisition        Corp, the Parent and Mr. Frederick H. Fialkow, Mr. Fialkow will contribute a portion of his        Common Shares to the Company in exchange for an 8% subordinated note in a principal amount        equal to the amount of cash he would otherwise have received for such Common Shares.

        At the effective time of the merger, all options issued under the Company’s Stock        Option Plans shall be converted into the right to receive a cash payment equal to the        product of (i) the total number of Common Shares otherwise issuable upon exercise of such        option and (ii) the amount, if any, by which the Merger Consideration per Common Share        exceeds the applicable exercise price per Common Share of such option.

        Consummation of the transactions contemplated by the Amended Merger Agreement is        conditioned upon, among other things, (1) healthcare regulatory approvals, (2) the absence        of a material adverse change in the Company, (3) the absence of a court order enjoining the        merger and (4) the amendment of the lease for the Company's Queens, New York facility. The        landlord to this lease is 175-20 Hillside Avenue Associates, which is a company that is        controlled by Frederick H. Fialkow, the Chairman of the Company's Board of Directors and        the holder of approximately 36% of the Company's outstanding common stock. The amendment of        this lease will, among other things, extend the term of the lease for an additional 5 years        (with two additional five year renewal options) and during such five year period, the        yearly rent will be subject to a 3% increase per year. Subject to the satisfaction of the        conditions to closing, it is anticipated that the merger will be consummated no later than        November 21, 2007.

        The Amended Merger Agreement contains customary representations and warranties by the        Company, the Acquisition Corp and the Parent. The Amended Merger Agreement also contains        customary covenants and agreements, including with respect to the operation of the business        of the Company and its subsidiaries between signing and closing, restrictions on        solicitation of proposals with respect to alternative transactions, governmental filings        and approvals, public disclosures and similar matters. Nothing in the Amended Merger        Agreement, however, prevents the Company from furnishing information to, or engaging in        discussions or negotiations with, any person that offers the Company a Superior Proposal        (as defined by the Amended Merger Agreement), or from accepting a Superior Proposal, which        in either such case the board of directors of the Company, upon the recommendation of the        special committee of the board of directors, determines in good faith (after consultation        with independent legal counsel) that such action is necessary for the board to comply with        its fiduciary duties to the Company's shareholders. If the Company accepts a Superior        Proposal, however, it must pay the Parent and Acquisition Corp a break-up fee of $2,300,000        plus the lesser of (i) the aggregate amount of Parent’s and Acquisition Corp’s        Expenses (as defined in the Amended Merger Agreement) or (ii) $1,500,000.

        -25-

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        A lawsuit has been commenced against the Company and its directors. Plaintiff moved for a        preliminary injunction, which was denied by the Court. The Amended Merger Agreement        includes a provision whereby the Parent consents to an additional payment of $0.10 per        share in cash to all Company shareholders other than the executive officers and directors        of the Company and members of their families as settlement of such action, subject to        certain conditions. A memorandum of understanding has been entered into by the parties to        the lawsuit.

        The Amended Merger Agreement may be terminated by any of the parties if there is any law        that prohibits the consummation of the merger; if a governmental order is issued that        prohibits the consummation of the merger or the payment of the Merger Consideration; or if        the merger is not consummated before November 21, 2007. The Parent or Acquisition Corp may        terminate the Amended Merger Agreement if, among other things, any of its closing        conditions are incapable of being satisfied; if the Company materially breaches any of its        representations, warranties or agreements in the Amended Merger Agreement; or if the        Company's board or its special committee withdraws or adversely modifies its favorable        recommendation of the Amended Merger Agreement, or fails to recommend against any        Acquisition Proposal (as defined in the Amended Merger Agreement). The Company may        terminate the Amended Merger Agreement if, among other things, any of its closing        conditions are incapable of being satisfied; if the Parent or Acquisition Corp materially        breaches any of its representations, warranties or agreements in the Amended Merger        Agreement; or if the Company complies with its covenants in the Amended Merger Agreement        and an Acquisition Proposal constitutes a Superior Proposal.

        The shareholders of the Company have approved the Amended Merger Agreement.

**Year Ended July 31, 2007 Compared to Year Ended July 31, 2006**

***Net Patient Revenue****.* For the fiscal year ended July 31, 2007        (“fiscal 2007”), net patient revenue increased $8,444,000, or 8.2%, to        $110,809,000 from $102,365,000 for the fiscal year ended July 31, 2006 (“fiscal        2006”). This increase was attributable to (i) an increase of $4,096,000 resulting        from the expansion of operations in Massachusetts, (ii) an increase of $2,790,000 resulting        from additional hours being subcontracted in New York and (iii) an increase of $1,919,000        resulting primarily from additional Medicare and Medicaid revenue in Connecticut. These        increases were offset by a decrease of $361,000 as a result of the Tool.

         

        -26-

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***Gross Profit****.* Gross profit margin decreased slightly to 33.2% for        fiscal 2007 from 33.3% for fiscal 2006. This decrease is attributable to higher wages paid        to caregivers offset by increases in certain reimbursement rates.

***General and Administrative****.* General and administrative expenses        increased $1,730,000, or 6.3%, to $29,343,000 in fiscal 2007 from $27,613,000 in fiscal        2006. This increase is primarily attributable to (i) increased home office costs of        $2,870,000, primarily consisting of professional fees incurred in connection with the        Merger in the amount of $2,446,000 and (ii) an increase of $449,000 in general and        administrative costs in Massachusetts as a result of the expansion of operations there.        This increase was offset by reduced occupancy and administrative personnel costs in New        Jersey, New York and Connecticut in the amount of $1,589,000, as the Company reduced costs        to compensate for the effects of the Tool and the elimination of the non-recurring legal,        consulting and administrative costs related to the above mentioned inspections and the        union election in New Jersey during fiscal 2006.

***Allowance for Possible Losses****.* The Company recorded an allowance for        possible losses of $1,253,000 in fiscal 2007 as compared to $559,000 in fiscal 2006. This        increase is attributable to the Company increasing reserves for possible losses from        certain payer sources and recording an additional allowances as a result of a Medicare        certified agency in New York filing for Chapter 11 bankruptcy in November 2006.

***Amortization of Intangibles****.* Amortization of intangibles decreased        $84,000, or 21.0%, to $320,000 in fiscal 2007 from $404,000 in fiscal 2006. This decrease        is attributable to intangibles from previous acquisitions that have now been fully        amortized.

***Income from Operations****.* As a result of the foregoing, income from        operations increased $333,000, or 6.0%, to $5,877,000 in fiscal 2007 from $5,544,000 in        fiscal 2006.

***Interest Income****.* Interest income increased $375,000, or 70.6%, to        $906,000 in fiscal 2007 from $531,000 in fiscal 2006. This increase is attributable to        higher cash balances of the Company during the fiscal year and increased interest        rates.

***Income Taxes****.* The Company’s effective tax rate increased to        56.5% in fiscal 2007 as compared to 39.8% in fiscal 2006. This increase is primarily        attributable to the professional fees incurred in connection with the Merger not being        deductible for income tax purposes.

***Net Income****.* Net income decreased $707,000, or 19.3%, to $2,948,000, or        $.51 per diluted share, in fiscal 2007 from $3,655,000, or $.64 per diluted share, in        fiscal 2006.

**Year Ended July 31, 2006 Compared to Year Ended July 31, 2005**

***Net Patient Revenue****.* For the fiscal year ended July 31, 2006 , net        patient revenue increased $3,904,000, or 4.0%, to $102,365,000 from $98,461,000 for the        fiscal year ended July 31, 2005 (“fiscal 2005”) This increase was attributable        to (i) an increase of $2,741,000 in New Jersey as a result of the acquisition of Helping        Hands and (ii) an increase of $6,145,000 resulting from the expansion of operations in        Massachusetts and additional hours being subcontracted in New York. The increase in net        patient revenue was offset by a decrease in Connecticut of $4,982,000, primarily as a        result of the above-mentioned inspections by the DPH, the elimination of small margin        revenue and the results of the above-mentioned audit by DSS.

        -27-

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***Gross Profit****.* Gross profit margin decreased to 33.3% for fiscal 2006        from 33.9% for fiscal 2005. This decrease is attributable to (i) higher wages paid to home        health aides in New York as a result of union increases, the increase in state minimum        wages and the increase in Medicaid wages paid to home health aides in Westchester County,        New York as a result of the living wage law that was enacted in 2004 and (ii) increases in        direct payments to all caregivers and increased worker compensation costs.

***General and Administrative****.* General and administrative expenses        increased $1,448,000, or 5.5%, to $27,613,000 in fiscal 2006 from $26,165,000 in fiscal        2005. This increase is primarily attributable to (i) increases in administrative personnel        and occupancy related costs resulting from the acquisition of Helping Hands in New Jersey,        (ii) increased legal and consulting fees as a result of the above-mentioned inspections in        Connecticut and the union election in New Jersey and (iii) increases in administrative        personnel in Massachusetts and New York resulting from the expansion of operations. As a        percentage of net patient revenue, general and administrative expenses increased to 27.0%        in fiscal 2006 from 26.6% in fiscal 2005.

***Allowance for Possible Losses****.* The Company recorded an allowance for        possible losses of $559,000 in fiscal 2006 as compared to $1,280,000 in fiscal 2005. The        Company had set up allowances for accounts receivable balances relating to two Medicare        certified agencies in fiscal 2004. Both of these agencies filed for Chapter 11 bankruptcy        protection during fiscal 2005, resulting in the Company recording an allowance of 75% on        these two accounts receivable balances. During fiscal 2006, the Company sold one of these        receivables for 60.5% of its balance. The other receivable remains, pending the outcome of        the bankruptcy proceeding.

***Amortization of Intangibles****.* Amortization of intangibles decreased        $176,000, or 30.3%, to $404,000 in fiscal 2006 from $580,000 in fiscal 2005. This decrease        is attributable to intangibles from previous acquisitions that have now been fully        amortized.

***Income from Operations****.* As a result of the foregoing, income from        operations increased $173,000, or 3.2%, to $5,544,000 in fiscal 2006 from $5,371,000 in        fiscal 2005.

***Interest Income****.* Interest income increased $256,000, or 93.1%, to        $531,000 in fiscal 2006 from $275,000 in fiscal 2005. This increase is attributable to        higher cash balances of the Company during the fiscal year and higher interest rates.

***Income Taxes****.* The Company’s effective tax rate increased to        39.8% in fiscal 2006 as compared to 36.8% in fiscal 2005. This increase is attributable to        a decrease in work opportunity tax credits in fiscal 2006 and an over accrual of taxes        recorded in fiscal 2004 that reduced income taxes in fiscal 2005.

***Net Income****.* Net income increased $88,000, or 2.5%, to $3,655,000, or        $.64 per diluted share, in fiscal 2006 from $3,567,000, or $.62 per diluted share, in        fiscal 2005.

        -28-

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**Financial Condition, Liquidity and Capital Resources**

        Current assets increased to $43,070,000 and current liabilities increased to $5,609,000 at        July 31, 2007. These changes resulted in an increase in working capital of $1,883,000 to        $37,461,000 at July 31, 2007 from $35,578,000 at July 31, 2006. Cash and cash equivalents        increased $2,593,000 to $21,894,000 at July 31, 2007 from $19,301,000 at July 31, 2006. The        increase in cash and cash equivalents and working capital was primarily attributable to the        cash generated by operating activities, offset by the payments of cash dividends.

        Net cash provided by operating activities was $4,901,000 in fiscal 2007 as compared with        $5,367,000 in fiscal 2006. The decrease in cash provided by operating activities of        $466,000, or 8.7%, is attributable to a decrease in operating cash flow of $499,000 and an        increase in operating assets, primarily accounts receivable, of $1,554,000, offset by an        increase in operating liabilities of $1,587,000 over fiscal 2006.

        Investing activities in fiscal 2007 used cash of $609,000 as compared to $536,000 in fiscal        2006. The cash used in investing activities in fiscal 2007 consisted of the purchase of        equipment. The cash used in investing activities in fiscal 2006 consisted of the purchase        of equipment, offset by the proceeds from the sale of investments.

        Financing activities in fiscal 2007 used cash of $1,699,000 as compared to $1,714,000 in        fiscal 2006. The cash used in financing activities in fiscal 2007 consisted of the payment        of cash dividends. The cash used in financing activities in fiscal 2006 consisted of the        payment of cash dividends and the purchase of treasury shares.

        The nature of the Company’s business requires weekly payments to health care        personnel at the time services are rendered. The Company typically receives payment for        these services in 90 to 150 days with respect to contracted and insurance business and 8 to        45 days with respect to certain governmental payers, such as Medicare and Medicaid        programs. Accounts receivable turnover was 67 days in fiscal 2007, as compared to 74 days        in fiscal 2006.

        The Company renewed its $7,500,000 revolving credit facility (the “credit        facility”) with Bank of America on April 17, 2007. The credit facility provides for        the Company’s subsidiaries to borrow up to $7,500,000 at the bank’s prime rate        or LIBOR plus 1.5%. The credit facility expires on April 2, 2008 and requires the Company        to meet certain financial and non-financial covenants. At July 31, 2007, there was no        outstanding balance under the credit facility. Borrowings are secured by a pledge of all of        the assets of the Company and its subsidiaries and guaranteed by the Company.

        The Company intends to incur capital expenditures of approximately $800,000 during the        fiscal year ending July 31, 2008 in connection with the proposed implementation of new        computer hardware, software and networking equipment. These expenditures would be designed        to, among other things, update data input capability regarding services rendered at certain        locations. The Company believes that these expenditures will provide efficiencies in data        organization, retrieval and analysis, both for continuing operations and in connection with        certain audits. The Company intends to fund these expenditures and cash dividends declared        by the Board of Directors and otherwise meet its short term and long term liquidity needs        from its current cash balances, cash flow from operations and its credit facility.

         

        -29-

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        In the opinion of management, there will be no material impact on the financial statements        of the Company from any recently issued accounting standards.

**Inflation and Seasonality**

        The rate of inflation had no material effect on operations for fiscal 2007. The effects of        inflation on personnel costs in the future could have an adverse effect on operations, as        the Company may not be able to increase its charges for services rendered. The        Company’s business is not seasonal.

**Contractual Obligations**

        The Company rents various office facilities through 2013 under terms of several lease        agreements that include escalation clauses. At July 31, 2007, minimum annual rental        commitments under noncancellable operating leases were as follows:

|             | Payments due by period |
|------------------|------------------------|
| Total            | Less than 1 year       | 1-3 years | 3-5 years | More than 5 years |
| Operating Leases | $2,331,000             | $1,161,000 | $991,000 | $179,000 | - - - - - |
| Total            | $2,331,000             | $1,161,000 | $991,000 | $179,000 | - - - - - |

|  | **Item 7A.** | ****Quantitative** and Qualitative Disclosures                    About Market Risk.** |
|--|--------------|----------------------------------------------------------------------------------------|

        None.

| **Item 8.** | ****Financial Statements** and                    Supplementary Data.** |
|-------------|-------------------------------------------------------------------------|

        The financial information required by this item is set forth in the Consolidated Financial        Statements on pages F-1 through F-31.

| **Item 9.** | ****Changes** In and Disagreements with Accountants                    on Accounting and Financial Disclosure.** |
|-------------|------------------------------------------------------------------------------------------------------------------|

        None.

|  | **Item 9A.** | ****Controls** and Procedures.** |
|--|--------------|----------------------------------|

**Evaluation of Disclosure Controls and Procedures**

        The Company maintains disclosure controls and procedures that are designed to ensure that        information required to be disclosed in the reports that the Company is required to file        under the Securities Exchange Act of 1934 (the “Exchange Act Reports”) is        recorded, processed, summarized and reported within the time periods specified in the rules        and forms of the Securities and Exchange Commission (the “SEC”), and that such        information is accumulated and communicated to the Company’s management, including        the principal executive officer and principal financial officer, as appropriate, to allow        timely decisions regarding required disclosure. The Company’s management necessarily        has applied its judgment in assessing the costs and benefits of such controls and        procedures, which, by their nature, can provide only reasonable assurance regarding        management’s control objectives. Management believes that there are reasonable        assurances that our controls and procedures will achieve management’s control        objectives.

        -30-

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        Prior to the filing date of this report, the Company carried out an evaluation, under the        supervision and with the participation of its management, including the President and Chief        Executive Officer and the Vice President of Finance and Chief Financial Officer, of the        effectiveness of the design and operation of the Company’s disclosure controls and        procedures pursuant to Exchange Act Rule 13a-15 as of July 31, 2007. Based upon that        evaluation, the President and Chief Executive Officer and the Vice President of Finance and        Chief Financial Officer concluded that the Company’s disclosure controls and        procedures are effective in timely alerting them to material information relating to the        Company (and its consolidated subsidiaries) required to be included in its Exchange Act        Reports.

**Changes in Internal Controls Over Financial Reporting**

        The evaluation referred to above did not identify any changes in the Company’s        internal controls over financial reporting that occurred during the quarter ended July 31,        2007 that have materially affected, or are reasonably likely to materially affect, the        Company’s internal control over financial reporting.

| **Item 9B.     ** | ****Other Information**.** |
|--------------------------------------------|----------------------------|

        None.

|  | **PART III** |  |
|--|--------------|--|

        The information required by each of the items of Part III (Items 10, 11, 12, 13 and 14) is        omitted from this Report. Pursuant to the General Instruction G(3) to Form 10-K, the        information will be included in the Company's Proxy Statement for its 2007 Annual Meeting        of Stockholders and is incorporated herein by reference. The Company intends to file such        Proxy Statement with the SEC not later than 120 days subsequent to July 31, 2007.

| **Item 10.     ** | ****Directors** and Executive Officers of the                    Registrant.** |
|--------------------------------------------|--------------------------------------------------------------------------------|

| **Item 11.     ** | Executive Compensation. |
|--------------------------------------------|-------------------------|

| **Item 12.     ** | Security Ownership of Certain Beneficial Owners and                    Management and Related Stockholder Matters. |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------------|

| **Item 13.     ** | Certain Relationships and Related                    Transactions. |
|--------------------------------------------|--------------------------------------------------------------------|

| **Item 14.     ** | Principal Accountant Fees and Services. |
|--------------------------------------------|-----------------------------------------|

 

-31-

----

 

| **PART IV** |  |
|-------------|--|

| **Item 15.     ** | ****Exhibits** and Financial Statement                    Schedules.** |
|--------------------------------------------|------------------------------------------------------------------------|

| (a)      | The following represents a listing of all financial statements, financial                    statement schedules and exhibits filed as part of this Report: |
|-----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

        Pages F-1 through F-31: Financial Statements and Supplemental Material (see index to the        consolidated financial statements).

| **Exhibit****Number** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1                   | Amended and Restated Agreement and Plan of Merger dated as of May 9, 2007                    (“Merger Agreement”) by and among the Registrant, AG Home Health                    Acquisition Corp. (“Acquisition Corp.”) and AG Home Health LLC                    (together with Acquisition Corp., the “AG Entities”). Incorporated                    by reference to the Registrant’s Proxy Statement dated May 16, 2007.                                                                                                                                                              |
| 2.2                   | Amendment No. 1 dated as of June 4, 2007 to the Merger Agreement. Incorporated                    by reference to the Registrant’s Proxy Statement Supplement dated June 5,                    2007.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.3                   | Letter Agreement dated August 30, 2007 among the Registrant and the AG                    Entities. Incorporated by reference to the Registrant’s Current Report on                    Form 8-K dated August 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1                   | Certificate of Incorporation. Incorporated by reference to the                    Registrant’s Registration Statement on Form S-1 (No. 2-86643) filed                    September 20, 1983.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2                   | Certificate of Amendment to Certificate of Incorporation. Incorporated by                    reference to the Registrant’s Annual Report on Form 10-K for the fiscal                    year ended July 31, 1992.                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.3                   | Amended By-laws. Incorporated by reference to the Registrant’s Annual                    Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1#                 | 1992 Stock Option Plan. Incorporated by reference to the Registrant’s                    Annual Report on Form 10-K for the fiscal year ended July 31, 1993.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2#                 | 1999 Stock Option Plan. Incorporated by reference to the Registrant’s                    Annual Report on Form 10-K for the fiscal year ended July 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3#                 | Amended and Restated Employment Agreement dated as of November 1, 2006 between                    the Registrant and Frederick H. Fialkow. Incorporated by reference to the                    Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended                    January 31, 2002 and the Registrant’s Current Reports on Form 8-K dated                    August 16, 2006 and September 24, 2007.                                                                                                                                                                                             |
| 10.4#                 | Employment Agreement dated as of August 1, 2005 between the Registrant and                    Steven Fialkow. Incorporated by reference to the Registrant’s Annual                    Report on Form 10-K for the fiscal year ended July 31, 2005.                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5#                 | Employment Agreement dated as of August 1, 2005 between the Registrant and                    Robert P. Heller. Incorporated by reference to the Registrant’s Annual                    Report on Form 10-K for the fiscal year ended July 31, 2005.                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6                  | Credit Agreement dated as of April 28, 2006, by and among National HMO (N.Y.)                    Inc., Health Acquisition Corp., New England Home Care, Inc., Accredited Health                    Services, Inc., Medical Resources Home Health Corp., and Connecticut Staffing                    Works Corp. (collectively, the “Subsidiaries”), as borrowers, the                    Company, as guarantor, and Bank of America, N.A. (the “Bank”), as                    lender. Incorporated by reference to the Registrant’s Current Report on                    Form 8-K dated June 20, 2006. |
| 10.7                  | Promissory Note dated April 28, 2006 in the amount of $7,500,000 from the                    Subsidiaries to the Bank. Incorporated by reference to the Registrant’s                    Current Report on Form 8-K dated June 20, 2006.                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8                  | Guarantee dated April 28, 2006 from the Company to                    the Bank. Incorporated by reference to the Registrant’s Current                    Report on Form 8-K dated June 20, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9                  | Security Agreement dated as of April 28, 2006 by and among the Subsidiaries, as                    borrowers, the Company, as guarantor, and the Bank, as lender. Incorporated by                    reference to the Registrant’s Current Report on Form 8-K dated June 20,                    2006.                                                                                                                                                                                                                                                                                                                          |
| 21.1*                 | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1*                 | Consent of Independent Registered Public                    Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1*                 | Rule 13a-14(a)/15d-14(a) Certification of                    Principal Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2*                 | Rule 13a-14(a)/15d-14(a) Certification of                    Principal Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1*                 | Section 1350 Certification of Principal                    Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2*                 | Section 1350 Certification of Principal                    Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

        __________

        #     Management contract or compensatory plan or arrangement.

        *     Filed herewith.

         

         

        -32-

----

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,        as amended, the Registrant has duly caused this report to be signed on its behalf by the        undersigned, thereunto duly authorized.

|  | NATIONAL HOME                HEALTH CARE CORP. /s/ Robert P.                Heller                                                       By:   Robert P. Heller                        Vice President of Finance                        and Chief Financial Officer |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

        Dated: October 29, 2007         

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this        report has been signed below by the following persons on behalf of the Registrant and in        the capacities and on the dates indicated.

| **SIGNATURE**                                                                                                                        | **TITLE**                                                                                                                        | **DATE**         |
|--------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|------------------|
|                                                                                                                                 |                                                                                                                             |             |
| /s/ Frederick H. Fialkow                        Frederick H. Fialkow                                             | Chairman of the Board of Directors                                                                                               | October 29, 2007 |
| /s/ Steven Fialkow                                                  Steven Fialkow | President, Chief Executive Officer, Secretary and Director (principal executive                    officer)                      | October 29, 2007 |
| /s/ Robert P.                    Heller                             Robert P. Heller    | Vice President of Finance, Chief Financial Officer and Treasurer (principal                    financial and accounting officer) | October 29, 2007 |
| /s/ Ira Greifer, M.D.                           Ira Greifer, M.D.                                 | Director                                                                                                                         | October 29, 2007 |
| /s/ Bernard Levine, M.D.                     Bernard Levine, M.D.                                                               | Director                                                                                                                         | October 29, 2007 |
| /s/ Robert Porder, M.D.                      Robert Pordy, M.D.                                                            | Director                                                                                                                         | October 29, 2007 |
| /s/ Harold Shulman                                                 Harold Shulman       | Director                                                                                                                         | October 29, 2007 |

 

-33-

         

         

         

         

         

         

**National Home Health Care Corp.**                                    and Subsidiaries

         

         

         

         

         

         

**Consolidated Financial**** Statements**

        and Supplemental Material

**Years Ended July 31, 2007, 2006 and 2005**

         

         

        F-1

----

| **National                    Home Health Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Contents**                                           |
|                                                        |

         

| **Report of Independent Registered Public Accounting Firm**            | F-3     |
|------------------------------------------------------------------------|---------|
|                                                                   |    |
| **Consolidated financial statements:**                                 |    |
| Balance sheets                                                         | F-4     |
| Statements of earnings                                                 | F-5     |
| Statements of changes in stockholders’ equity                    | F-6     |
| Statements of cash flows                                               | F-7     |
| Summary of accounting policies                                         | F-8-13  |
| Notes to consolidated financial statements                             | F-14-29 |
|                                                                   |    |
| **Supplemental material:**                                             |    |
| Report of Independent Registered Public Accounting Firm on Schedule II | F-30    |
| Schedule II - Valuation and Qualifying Accounts                        | F-31    |
|                                                                   |    |

 

**F-2**

----

 

**Report of        Independent Registered Public Accounting Firm**

Board of Directors and        Stockholders

National Home Health Care        Corp.

Scarsdale, New York

We have audited the        accompanying consolidated balance sheets of National Home Health Care Corp. and        Subsidiaries as of July 31, 2007 and 2006 and the related consolidated statements of        earnings, changes in stockholders’equity, and cash flows for        each of the three years in the period ended July 31, 2007. These financial statements are        the responsibility of the Company’s management. Our responsibility is to express an        opinion on these financial statements based on our audits.

We conducted our audits in        accordance with the standards of the Public Company Accounting Oversight Board (United        States). Those standards require that we plan and perform the audit to obtain reasonable        assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were        we engaged to perform, an audit of its internal control over financial reporting.Our audits included        consideration of internal control over financial reporting as a basis for designing audit        procedures that are appropriate in the circumstances, but not for the purpose of expressing        an opinion on the effectiveness of the Company’s internal control over financial        reporting. Accordingly, we express no such opinion. An audit also includes examining, on a        test basis, evidence supporting the amounts and disclosures in the financial statements,        assessing the accounting principles used and significant estimates made by management, as        well as evaluating the overall financial statement presentation. We believe that our audits        provide a reasonable basis for our opinion.

In our opinion, the        consolidated financial statements referred to above present fairly, in all material        respects, the financial position of National Home Health Care Corp. and Subsidiaries at        July 31, 2007 and 2006, and the results of their operations and their cash flows for each        of the three years in the period ended July 31,        2007**,**in conformity with accounting        principles generally accepted in the United States of America.

        /s/ BDO Seidman, LLP

BDO Seidman, LLP

Valhalla, New York

October 26, 2007

         

**F-3**

----

| **National                    Home Health Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Consolidated Balance                    Sheets**     |
|                                                        |

         

| *July 31,*                                                                                                                  | **2007**                   | 2006              |
|-----------------------------------------------------------------------------------------------------------------------------|----------------------------|-------------------|
| **Assets**                                                                                                                  |                       |              |
| **Current:**                                                                                                                |                       |              |
| Cash, (including cash equivalents of $21,893,000                    and $19,289,000, respectively) (Note 6)                 | **$21,894,000 **      | $19,301,000  |
| Accounts receivable, less allowance for possible                    losses of $877,000 and $1,419,000 respectively (Note 6) | ** 19,806,000 ** | 18,837,000   |
| Prepaid expenses and other                                                                                                  | **688,000 **          | 934,000      |
| Income taxes receivable                                                                                                     | **162,000 **          | -            |
| Deferred income taxes (Note 5)                                                                                              | **520,000 **          | 862,000      |
| **Total current assets**                                                                                                    | **43,070,000 **       | 39,934,000   |
| **Furniture, equipment and                    leasehold improvements, net (Note 1)**                                   | **1,871,000 **        | 1,865,000    |
| Goodwill                                                                                                                    | **14,463,000 **       | 14,463,000   |
| Other intangible assets, net (Note 2)                                                                                       | **659,000 **          | 980,000      |
| Deposits and other assets                                                                                                   | **591,000 **          | 522,000      |
|                                                                                                                        | **$60,****654,000 **  | $57,764,000  |
| **Liabilities and Stockholders****’****Equity**                                                                       |                       |              |
| **Current liabilities:**                                                                                                    |                       |              |
| Accounts payable and accrued expenses (Note                    3)                                                           | **$4,870,000 **       | $3,354,000   |
| Estimated third-party payer                    settlements                                                                  | **9,000 **            | 316,000      |
| Deferred revenue                                                                                                            | **305,000 **          | 255,000      |
| Dividend payable                                                                                                            | **425,000 **          | 425,000      |
| Income taxes payable                                                                                                        | **- **                | 6,000        |
| **Total current liabilities**                                                                                               | **5,609,000 **        | 4,356,000    |
| Deferred income taxes (Note 5)                                                                                              | **933,000 **          | 545,000      |
|                                                                                                                        | **6,542,000 **        | 4,901,000    |
|                                                                                                                        |                       |              |
| **Commitments and                    conting****encies (Note 8****)**                                                       |                       |              |
| **Stockholders****’****equity (Note                    7****):**                                                      |                       |              |
| Common stock, $.001 par value, shares authorized                    – 20,000,000; issued 7,125,544                    | **7,000 **            | 7,000        |
| Additional paid-in capital                                                                                                  | **26,532,000 **       | 26,532,000   |
| Retained earnings                                                                                                           | **31,421,000 **       | 30,172,000   |
|                                                                                                                        | **57,960,000 **       | 56,711,000   |
| Less treasury stock (1,462,953 shares) - at                    cost                                                         | **(3,848,000)**            | (3,848,000)       |
| **Total                    stockholders****’****equity**                                                              | **54,112,000 **       | 52,863,000   |
|                                                                                                                        | **$****60,654,000 **  | $57,764,000  |

*  See accompanying summary of accounting        policies**and notes to consolidated financial        statements.*

 

**F-4**

----

| **National Home Health                    Care Corp.**     |
|------------------------------------------------------------|
| **and                    Subsidiaries**                    |
|                                                       |
|                                                       |
| **Consolidated Statements                    of Earnings** |
|                                                            |

         

| *Years ended July 31,*                             | **2007**         | **2006**              | 2005                                    |
|----------------------------------------------------|------------------|-----------------------|-----------------------------------------|
| **Net patient revenue (Note 6****)**               | **$110,809,000** | **$102,365,000**      | $98,461,000                             |
| **Operating expenses:**                            |             |                  |                                    |
| Cost of revenue                                    | **74,016,000**   | **68,245,000**        | 65,065,000                              |
| General and administrative                         | **29,343,000**   | **27,613,000**        | 26,165,000                              |
| Allowance for possible losses                      | **1,253,000**    | **559,000**           | 1,280,000                               |
| Amortization of intangibles                        | **320,000**      | **404,000**           | 580,000                                 |
| **Total operating expenses**                       | **104,932,000**  | **96,821,000**        | 93,090,000                              |
| **Income from operations**                         | **5,877,000**    | **5,544,000**         | 5,371,000                               |
| **Other income:**                                  |             |                  |                                    |
| Interest                                           | **906,000**      | **531,000**           | 275,000                                 |
| **Income before income taxes**                     | **6,783,000**    | **6,075,000**         | 5,646,000                               |
| **Pr****ovision for income taxes (Note 5****)**    | **3,835,000**    | **2,420,000**         | 2,079,000                               |
| **Net income**                                     | **$ 2,948,000**  | **$  3,655,000** | $  3,567,000                       |
| **Net income per common share:**                   |             |                  |                                    |
| Basic                                              | **$.52**         | **$.65**              | $.63                                    |
| **Diluted**                                        | **$.51**         | **$.64**              | $.62                                    |
| **Weighted average number of shares outstanding:** |             |                  |                                    |
| Basic                                              | **5,662,531**    | **5,663,185**         |      5,637,510 |
| Diluted                                            | **5,744,384**    | **5,741,370**         |      5,732,842 |
|                                               |             |                  |                                    |
| Dividends declared per share                       | **$.30**         | **$.30**              | $.30                                    |

*See accompanying summary of accounting policies        and notes to consolidated financial statements.*

 

**F-5**

----

| **National Home Health                    Care Corp.**                                        |
|-----------------------------------------------------------------------------------------------|
| **and                    Subsidiaries**                                                       |
|                                                                                          |
| **Consolidated Statements of Changes in                    Stockholders’ Equity ** |
|                                                                                               |

         

|                                  |          |       |   |                         |                |           |
|---------------------------------------|---------------|------------|--------|------------------------------|---------------------|----------------|
|                                  | Common Stock  |       |   |                         |                | Treasury Stock |
|                                  | *Shares*      | *Amount*   |   | *Additional Paid-in Capital* | *Retained Earnings* |           | *Shares* | *Amount* |
| Balance, July 31, 2004                | 7,041,388     | $7,000     |   | $26,174,000                  | $26,342,000    |           | 1,424,883 | $(3,484,000) |
| Net income                            | -             | -          |   | -                            | 3,567,000      |           | - | -  |
| Exercise of stock options             | 84,156        | -          |   | 355,000                      | -              |           | - | -  |
| Tax benefit of stock option exercised | -             | -          |   | 3,000                        | -              |           | - | -  |
| Acquisition of treasury shares        | -             | -          |   | -                            | -              |           | 36,477 | (349,000) |
| Dividends on common stock             | -             | -          |   | -                            | (1,693,000)         |           | - | -  |
| Balance, July 31, 2005                | 7,125,544     | 7,000      |   | 26,532,000                   | 28,216,000     |           | 1,461,360 | (3,833,000) |
| Net income                            | -             | -          |   | -                            | 3,655,000      |           | - | -  |
| Acquisition of treasury shares        | -             | -          |   | -                            | -              |           | 1,593 | (15,000) |
| Dividends on common stock             | -             | -          |   | -                            | (1,699,000)         |           | - | -  |
| Balance, July 31, 2006                | 7,125,544     | 7,000      |   | 26,532,000                   | 30,172,000     |           | 1,462,953 | (3,848,000) |
| Net income                            | -             | -          |   | -                            | 2,948,000      |           | - | -  |
| Dividends on common stock             | -             | -          |   | -                            | (1,699,000)         |           | - | -  |
| **Balance, July 31, 2007**            | **7,125,544** | **$7,000** |   | **$26,532,000**              | **$31,421,000**     |           | **1,462,953** | **$(3,848,000)** |

*See accompanying summary of accounting policies        and notes to consolidated financial statements.*

         

****F-6****

----

| ** National Home                    Health Care Corp.** |
|--------------------------------------------------------------|
| **and                    Subsidiaries**                      |
|                                                         |
|                                                         |
| **Consolidated Statements                    of Cash Flows** |
|                                                              |

         

         

| *Years ended July 31,*                                                                               | **2007**                                                             | 2006                                                             | 2005                                              |
|------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|------------------------------------------------------------------|---------------------------------------------------|
| **Cash flows from operating                    activities:**                                         |                                                                 |                                                             |                                              |
| Net income                                                                                           | **$  2,948,000 **                                          | $  3,655,000                                           | $  3,567,000                            |
| Adjustments to reconcile net income to net cash                    provided by operating activities: |                                                                 |                                                             |                                              |
| Depreciation and amortization                                                                        | **924,000 **                                                    | 954,000                                                     | 986,000                                      |
| Allowance for possible losses, net of                    write-offs                                  | **(542,000)**                                                        | (447,000)                                                        | 744,000                                      |
| Loss on sale of assets                                                                               | **- **                                                          | -                                                           | 3,000                                        |
| Deferred income taxes                                                                                | **730,000 **                                                    | 397,000                                                     | (187,000)                                         |
| Tax benefit realized from the exercise of stock                    options                           | **- **                                                          | -                                                           | 3,000                                        |
| Changes in assets and liabilities:                                                                   |                                                                 |                                                             |                                              |
| Accounts receivable                                                                                  | **(427,000)**                                                        | 1,174,000                                                   | (2,224,000)                                       |
| Prepaid expenses and other                                                                           | **177,000 **                                                    | (165,000)                                                        | 99,000                                       |
| Income taxes receivable                                                                              | **(168,000)**                                                        | 127,000                                                     | (148,000)                                         |
| Accounts payableandaccrued                    expenses                                               | **1,516,000 **                                                  | (417,000)                                                        | 449,000                                      |
| Estimated third-party payer settlements                                                              | **(307,000)**                                                        | 244,000                                                     | (624,000)                                         |
| Deferred revenue                                                                                     | **50,000 **                                                     | (155,000)                                                        | 8,000                                        |
| **Net cash provided by operating                    activities**                                     | **4,901,000 **                                                  | 5,367,000                                                   | 2,676,000                                    |
| **Cash flows from investing                    activities:**                                         |                                                                 |                                                             |                                              |
| Purchase property, plant and equipment                                                               | **(609,000)**                                                        | (555,000)                                                        | (1,166,000)                                       |
| Proceeds from sale of investments                                                                    | **- **                                                          | 19,000                                                      | -                                            |
| Purchase of assets of businesses                                                                     | **- **                                                          | -                                                           | (4,249,000)                                       |
| **Net cash used in investing                    activities**                                         | **(609,000)**                                                        | (536,000)                                                        | (5,415,000)                                       |
| **Cash flows from financing                    activities:**                                         |                                                                 |                                                             |                                              |
| Purchase of treasury shares                                                                          | **- **                                                          | (15,000)                                                         | ( 349,000)                                        |
| Proceeds from exercise of stock options                                                              | **- **                                                          | -                                                                | 355,000                                      |
| Payment of dividends                                                                                 | **(1,699,000)**                                                      | (1,699,000)                                                      | (1,268,000)                                       |
| **Net cash used in financing                    activities**                                         | **(1,699,000)**                                                      | (1,714,000)                                                      | (1,262,000)                                       |
| **Net increase (decrease) in cash and cash equivalents**                                             | **2,593,000 **                                                  | 3,117,000                                                   | (4,001,000)                                       |
| **Cash and cash equivalents, beginning of                    year**                                  | **19,301,000 **                                                 | 16,184,000                                                  | 20,185,000                                   |
| **Cash and cash equivalents, end of                    year**                                        | **$21,894,000 **                                                | $19,301,000                                                 | $16,184,000                                  |
| **Supplemental disclosure of cash flow                    information:**                             |                                                                 |                                                             |                                              |
| Cash paid for:                                                                                       |                                                                 |                                                             |                                              |
| Interest                                                                                             | **$        ****1,000 ** | $                          10,000  | $      24,000  |
| Income taxes                                                                                         | **$   3,332,000**                                          | $  1,946,000                                           | $ 2,409,000                                  |
| Dividends declared and not paid                                                                      | **$                         425,000**            | $     425,000                                | $    425,000                  |

*       See accompanying summary of accounting policies        and notes to consolidated financial statements.*

**F-7**

----

 

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

| **Business**                                                                                | National Home Health Care Corp. and subsidiaries (the “Company”) is                    a provider of home health care services, including nursing care, personal care,                    supplemental staffing and other specialized health services in the North                    Eastern part of the United States.                                                                                                                                                                             |
|---------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Principles of                    Consolidation                                              | The consolidated financial statements include the accounts of National Home                    Health Care Corp. and its wholly-owned subsidiaries. All significant                    intercompany balances and transactions have been eliminated in the consolidated                    financial statements.                                                                                                                                                                                                  |
|                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Revenue Recognition and                    Allowance for Possible                    Losses | Net patient revenues are recorded at estimated net realizable amounts from                    patients, third-party payers and others for services rendered. An allowance for                    possible losses is recorded based upon management’s evaluation of current                    industry conditions, historical collection experience and other relevant                    factors which, in the opinion of management, require recognition in estimating                    the allowance. |
|                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                        | Under Medicaid, Medicare and other reimbursement programs, the Company is                    reimbursed for services rendered to covered program patients as determined by                    reimbursement formulas and regulations. Laws and regulations governing these                    programs are complex and subject to interpretation.                                                                                                                                                                |
|                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                        | The Company is reimbursed by Medicare based on episodes of care. An episode of                    care is defined as a length of care up to sixty days with multiple continuous                    episodes allowed. Deferred revenue represents the unearned cash received from                    an episode of care.                                                                                                                                                                                          |
|                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                        | Approximately 50%, 51% and 51% of net patient revenue for the fiscal years                    ended July 31, 2007, 2006 and 2005, respectively, were derived under federal                    and state third-party reimbursement programs.                                                                                                                                                                                                                                                                      |

 

**F-8**

----

 

 

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

| Cash and Cash                    Equivalents                                          | For the purposes of the statements of cash flows, the Company considers all                    highly liquid investment instruments purchased with a maturity of three months                    or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Furniture, Equipment                    and Leasehold                    Improvements | Furniture, equipment and leasehold                    improvements are stated at cost. Depreciation is being provided on the                    straight-line method over the estimated useful lives of the assets (generally                    five to ten years). Amortization of leasehold improvements is being provided on                    the straight-line method over the various lease terms or estimated useful                    lives, if shorter.                                                                                                                                                                        |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Goodwill****and                    Intangible Assets**                              | The Company follows Statement of                    Financial Accounting Standards (“SFAS”) No. 141, “Business                    Combinations” and No. 142, “Goodwill and Intangible Assets”.                    SFAS No. 141 requires the use of the purchase method of accounting and                    prohibits the use of the pooling-of-interests method of accounting. SFAS No.                    141 also requires that the Company recognize acquired intangible assets apart                    from goodwill if the acquired intangible assets meet certain                    criteria. |
|                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                  | SFAS No. 142 requires, among other                    things, that companies no longer amortize goodwill, but instead test goodwill                    for impairment at least annually. In addition, SFAS No. 142 requires that the                    Company identify reporting units for the purpose of assessing potential future                    impairments of goodwill, reassess the useful lives of other existing recognized                    intangible assets and cease amortization of intangible assets with an                    indefinite useful life.                                                              |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Net Income Per                    Common Share**                               | Basic net income per common share is                    computed by dividing net income available to common shareholders by the                    weighted average number of common shares outstanding. Diluted earnings per                    common share reflect, in periods in which they have a dilutive effect, the                    impact of common shares issuable upon exercise of stock options.                                                                                                                                                                                                                            |

         

         

**F-9**

----

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

| **Net Income Per                    Common Share                    (continued)** | The reconciliation of net income per common share is as follows: |
|----------------------------------------------------------------------------------------|------------------------------------------------------------------|

| *Years ended July 31,*                                                        | **2007**      | 2006      | 2005      |
|-------------------------------------------------------------------------------|---------------|-----------|-----------|
|                                                                          | ***Shares***  | *Shares*  | *Shares*  |
| Average number of shares outstanding                                          | **5,662,531** | 5,663,185 | 5,637,510 |
| Effect of dilutive securities – common stock                    options | **81,853**    | 78,185    | 95,332    |
| Diluted shares outstanding                                                    | **5,744,384** | 5,741,370 | 5,732,842 |

 

 

 

|                                                                    | The number of options that were anti-dilutive and excluded from the computation                    was 89,000 for the year ended July 31, 2007, 152,250 for the year ended                    July 31, 2006 and 157,500 for the year ended July 31, 2005.                                                                                                                                                                                                                                                                                                              |
|--------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Fair Value of Financial                    Instruments**         | The carrying amounts reported in the consolidated balance sheets for cash,                    accounts receivable, accounts payable and accrued expenses approximate fair                    value because of the immediate or short-term maturity of the financial                    instruments.                                                                                                                                                                                                                                                                         |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Estimated Third-Party                    Payer Settlement****s** | The amount represents overpayments from certain third-party payers. The Company                    anticipates that the third-party payers will recoup these funds in subsequent                    periods.                                                                                                                                                                                                                                                                                                                                                                |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Use of Estimates**                                               | The preparation of financial statements in conformity with generally accepted                    accounting principles requires management to make estimates and assumptions                    that affect the reported amounts of assets and liabilities at the date of the                    financial statements and the reported amounts of revenues and expenses during                    the reporting period. Actual results could differ from those estimates. Such                    estimates relate primarily to valuation reserves for accounts receivable. |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

**F-10**

----

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

| **Workers****’****Compensation**          | The Company self-insures up to specified limits certain risks related to                    workers’ compensation liability. The estimated costs of existing and                    expected future claims under the insurance program are accrued based upon                    historical loss trends and may be subsequently revised based on developments                    relating to such claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Income Taxes**                                | The Company accounts for income taxes under an asset and liability approach                    that requires the recognition of deferred tax assets and liabilities for the                    expected future tax consequences of events that have been recognized in the                    Company’s financial statements or tax returns. The effect on deferred tax                    assets and liabilities of changes in tax rates will be recognized as income or                    expense in the period that includes the enactment date. The Company files a                    consolidated Federal income tax return with its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                     |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Long-Lived Assets**                           | Long-lived assets, such as intangible assets, furniture, equipment and                    leasehold improvements, are evaluated for impairment when events or changes in                    circumstances indicate that the carrying amount of the assets may not be                    recoverable through estimated undiscounted future cash flows from the use of                    these assets. When any such impairment exists, the related assets will be                    written down to fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Stock Based                    Compensation** | In December of 2004, the Financial Accounting Standards Board                    (“FASB”) issued SFAS No. 123 (revised), “Share Based                    Payment.” SFAS No. 123R provides investors and other users of financial                    statements with more complete and neutral financial information by requiring                    that the compensation cost relating to share-based payment transactions be                    recognized in financial statements. The Company adopted SFAS No. 123R in the                    first quarter of fiscal 2006. This standard requires that the Company measure                    the cost of employee services received in exchange for any award of equity                    instruments based on the grant date fair value of the award. That cost will be                    recognized over the period in which the employee is required to provide the                    services - the requisite service period (usually the vesting period) - in |

 

**F-11**

----

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

|  **Stock Based****Compensation                (Continued)** | exchange for the award. The grant date fair value for options and similar                    instruments will be estimated using option pricing models. Under SFAS No. 123R,                    the Company is required to select a valuation technique or option pricing model                    that meets the criteria as stated in the standard, which includes a binomial                    model and the Black-Scholes model. At the present time, the Company is                    continuing to use the Black - Scholes model. The adoption of SFAS No. 123R,                    applying the “modified prospective method,” as elected by the                    Company, requires the Company to value stock options prior to its adoption of                    SFAS No. 123R under the fair value method and expense these amounts over the                    remaining vesting period of the stock options. SFAS No. 123R requires that the                    Company estimate forfeitures for stock options and reduce compensation expense                    accordingly. The adoption of SFAS No. 123R did not have any impact on the                    Company’s overall results of operations for the year ended July 31,                    2006. |
|------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                             | Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based                    compensation using the intrinsic value method under Accounting Principles Board                    Opinion No. 25, “Accounting for Stock Issued to Employees,” and                    related interpretations in accounting for its stock option plan by recording as                    compensation expense the excess of the fair market value of the underlying                    common stock over the exercise price per share as of the date of grant. Because                    the exercise price of the Company’s employee stock options equaled the                    market price of the underlying stock on the date of grant, no compensation                    expense was recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                  | No stock options were granted or vested in the fiscal years 2005 and through 2007,                accordingly there was no effect on the operating results or pro forma results for                any of the years presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

         

         

         

         

         

**F-12**

----

| **National Home Health                    Care Corp.** |
|--------------------------------------------------------|
| **and                    Subsidiaries**                |
|                                                   |
|                                                   |
| **Summary of Accounting                    Policies**  |
|                                                        |

 

| **Segments**                         | The Company’s management considers its business to be a single segment -                    Home Healthcare Services. Home Healthcare Services net patient revenue is                    provided by health care personnel, and the Company’s customers are                    similar for all sources of net patient revenue. Management evaluates its                    operating results on an integrated basis.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Recent Accounting Pronouncements** | In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for                    Uncertainty in Income Taxes *-* an interpretation of FASF Statement No.                    109, (FIN 48), which establishes that the financial statement effects of a tax                    position taken or expected to betaken in a tax return are to be recognized in                    the financial statements when it is more likely than not, based on the                    technical merits, that the position will be sustained upon examination. FIN 48                    is effective for fiscal years beginning after December 15,2006.  The                    Company does not believe that the adoption of FIN 48 will have a material                    impact on its results from operations or financial   position. |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Reclassifications**                | Certain reclassifications have been made in prior years’ financial                    statements to conform to classifications used in the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

**F-13**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **1.** | **Furniture, Equipment and                    Leasehold Improvements** | Furniture, equipment and leasehold improvements are stated at cost and are                    summarized as follows: |
|--------|------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|

| *July 31,*                                     | **2007**       | 2006       |
|------------------------------------------------|----------------|------------|
| Furniture and equipment                        | **$4,809,000** | $4,346,000 |
| Leasehold improvements                         | **721,000**    | 575,000    |
|                                           | **$5,530,000** | 4,921,000  |
| Less accumulated depreciation and amortization | **3,659,000**  | 3,056,000  |
|                                           | **$1,871,000** | $1,865,000 |

 

 

 

         

         

         

         

         

         

         

         

         

         

         

         

         

**F-14**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **2****.** | **Other Intangible                    Assets** | Other intangible assets are as follows: |
|------------|------------------------------------------------|-----------------------------------------|

| *July 31,*                    | **2007**                  | 2006                  |
|-------------------------------|---------------------------|-----------------------|
| **Gross carrying amount:**    |                      |                  |
| Covenants not to compete      | **$1,750,000**            | $1,750,000            |
| Patient and other files       | **2,796,000**             | 2,796,000             |
| Contracts                     | **1,234,000**             | 1,234,000             |
|                          | **5,780,000**             | 5,780,000             |
| **Accumulated amortization:** |                      |                  |
| Covenants not to compete      | **1,748,000**             | 1,608,000             |
| Patient and other files       | **2,766,000**             | 2,709,000             |
| Contracts                     | **607,000**               | 483,000               |
|                          | **5,121,000**             | 4,800,000             |
| Balance, end of year          | **$   659,000** | $   980,000 |

 

 

 

 

 

 

|        |        |                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | The aggregated amortization expense for the years ended July 31, 2007, 2006 and                    2005 was $320,000, $404,000 and $580,000, respectively. |
|        |        |                                                                                                                                                            |
|   |   | Estimated amortization expense is as follows:                                                                                                              |

| *Years ending July 31,* |   |         |
|-------------------------|--------|--------------|
| 2008                    |   | **$155,000** |
| 2009                    |   | **123,000**  |
| 2010                    |   | **123,000**  |
| 2011                    |   | **123,000**  |
| 2012                    |   | **123,000**  |
|                    |   | **$647,000** |

 

 

 

 

 

**F-15**

----

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **2****.** | **Other Intangible                    Assets (continued)** | The remaining weighted average amortization period is as follows: |
|------------|------------------------------------------------------------|-------------------------------------------------------------------|

| *Year ended July 31,*    | **2007**                        |
|--------------------------|---------------------------------|
| Covenants not to compete | **.02   year**        |
| Patient and other files  | **  .18   year** |
| Contracts                | **5.91 year****s**              |
|                     | **1.53 year****s**              |

 

 

 

 

 

 

                   Other intangible assets are        being amortized using the straight-line method over a period of three to ten years.

| **3****.** | **Accounts Payable                    and Accrued                    Expenses** | Accounts payable and accrued expenses are as follows: |
|------------|---------------------------------------------------------------------------------|-------------------------------------------------------|

| *July 31,*                                                      | **2007**                         | 2006                   |
|-----------------------------------------------------------------|----------------------------------|------------------------|
| Trade accounts payable                                          | **  $   501,000** | $    302,000 |
| Accrued employee

                    compensation and benefits | **3,617,000**                    | 2,640,000              |
| Accrued expenses                                                | **718,000**                      | 387,000                |
| Other                                                           | **34,000**                       | 25,000                 |
|                                                            | **$4,870,000**                   | $ 3,354,000       |

 

 

 

 

 

**F-16**

----

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **4.** | Acquisitions | On October 6, 2004, the Company acquired certain assets of On Duty Metropolitan                    Connecticut, LLC for $1,078,000 in cash, including acquisition costs of                    $103,000. The assets purchased consisted of furniture and equipment of $10,000,                    a covenant not to compete of $75,000 and goodwill of $993,000.                                              |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |              |                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |              | On May 22, 2005, the Company acquired certain assets of Helping Hands Health                    Care for $3,171,000 in cash, including acquisition costs of $152,000. The                    assets purchased consisted of furniture and equipment of $10,000, deferred and                    other assets of $19,000, a covenant not to compete of $300,000 and goodwill of                    $2,842,000. |
|        |              |                                                                                                                                                                                                                                                                                                                                                                                                              |
|        |              | The above acquisitions have been recorded using the purchase method of                    accounting. Accordingly, the results of these operations have been included in                    the accompanying consolidated financial statements since the dates of                    acquisition.                                                                                                            |
|        |              |                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |         | The effects of each of the above acquisitions on the consolidated results of                    operations were not significant.                                                                                                                                                                                                                                                                             |

         

**F-17**

----

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **5.** | Income Taxes | The provision for income taxes is                    summarized as follows: |
|--------|--------------|-----------------------------------------------------------------------------|

         

| *Years ended July 31,* | **2007**       | 2006       | 2005             |
|------------------------|----------------|------------|------------------|
| Current:               |           |       |             |
| Federal                | **$2,265,000** | $1,655,000 | $1,741,000  |
| State                  | **840,000**    | 368,000    | 525,000     |
|                   | **3,105,000**  | 2,023,000  | 2,266,000   |
| Deferred               | **730,000**    | 397,000    | (187,000)        |
|                   | **$3,835,000** | $2,420,000 | $2,079,000  |

 

 

 

 

|   |   | The deferred tax asset (liability) consists of the following: |
|--------|--------|---------------------------------------------------------------|

| *July 31,*                       | **2007**                             | 2006                       |
|----------------------------------|--------------------------------------|----------------------------|
| Current:                         |                                 |                       |
| Accrued liabilities and reserves | **$**** ****520****,000 ** | $  862,000  |
|                             |                                 |                       |
| Long Term:                       |                                 |                       |
| Fixed assets and intangibles     | **(933,000)**                        | (545,000)                  |
|                             | **$****(****413,000)**               | $  317,000  |

 

 

 

 

|   |   | The reconciliation of the statutory tax rate to the effective tax rate is as                    follows: |
|--------|--------|----------------------------------------------------------------------------------------------------------|

| *Years ending July 31,*                                                                                               | **2007**                                                                    | 2006                                                  | 2005                                                             |
|-----------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|-------------------------------------------------------|------------------------------------------------------------------|
| Statutory rate                                                                                                        | **34%**                                                                     | 34%                                                   | 34%                                                              |
| State and local taxes                    (net of federal tax effect)                              | **8    **                                                    | 5                                      | 6                                                 |
| Federal tax credit                                                                                                    | **(1)   **                                                   |  (1)                                   | (2)                                                    |
| Nondeductible charge                    for    Mergerrelated expenses (See Note                    10) | **                          12   ** |                         -    |                         -     |
| Other                                                                                                                 | **3  **                                                      | 2                                      | (1)                                                    |
| Effective rate                                                                                                        | **56****%**                                                                 | 40%                                                   | 37%                                                              |

 

 

 

 

 

**F-18**

----

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **6.** | **Concentrations of                    Credit Risk and                    Major Customers** | The Company’s business is with customers who are in the healthcare                    industry or with governmental agencies.                                                                                                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                        | The Company provides temporary health care personnel to in-home patients and                    facilities in the New York City metropolitan area, Connecticut, New Jersey and                    Massachusetts. Credit losses relating to customers have been within                    management’s expectations.                                                                                                                                                   |
|        |                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                        | At July 31, 2007, the Company maintained approximately 63% of its cash and cash                    equivalents with one financial institution.                                                                                                                                                                                                                                                                                                                              |
|        |                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                        | Under certain federal and state third-party reimbursement programs, the Company                    received net patient revenue of approximately $55,910,000, $52,472,000 and                    $50,522,000 for the years ended July 31, 2007, 2006 and 2005, respectively. At                    July 31, 2007 and 2006, the Company had aggregate outstanding receivables from                    federal and state agencies of $6,570,000 and $5,741,000, respectively. |
|   |                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **7.** | Stock Options                                                                               | In 1992, the Company adopted an Employee Stock Option Plan (the                    “Plan”) designed to provide incentives to key employees and to                    non-employee directors of the Company. The Plan expired in July of 2002.                    Options granted under the Plan expire not more than ten years from the date of                    grant and vested immediately.                                                                |

         

         

**F-19**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **7.** | Stock Options                    (continued) | In 1999, the Company adopted a                    second Employee Stock Option Plan (the “1999 Plan”). The 1999 Plan                    was also designed to provide incentives to key employees (including directors                    and officers who are key employees) and to non-employee directors of the                    Company. The 1999 Plan authorizes the granting of both incentive and                    non-qualified stock options to purchase up to 551,250 shares of the                    Company’s common stock. As of July 31, 2007, 361,116 shares of the                    Company’s common stock have been reserved for future issuance. Unless                    sooner terminated, the 1999 Plan will expire in October 2009. Options granted                    under the 1999 Plan expire not more than ten years from the date of grant and                    vest immediately. |
|--------|----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                         | A summary of the status of the                    Company’s stock option plans as of July 31, 2007, 2006 and 2005 and                    changes for the years ended on those dates is presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

         

|                                        | Number of shares          | Expiration date | Weighted average                    exercise price                                                                            |
|---------------------------------------------|---------------------------|-----------------|-------------------------------------------------------------------------------------------------------------------------------|
| Options outstanding at July 31, 2004        | 378,439              | 2004-2011       | $    8.51                                                                                                      |
| Options exercised                           | (84,156)                  | 2004-2009       | $      .22                                                                                      |
| Options forfeited                           | (10,500)                  | 2011            | $  13.58                                                                                                                 |
|   Options outstanding at July 31, 2005 | 283,783    | 2007-2011       | $    9.60                                                                                                      |
| Options exercised                           | -               | -               |                             $          - |
| Options forfeited                           | (5,250)                   | 2011            | $  13.58                                                                                                            |
| Options outstanding at July 31, 2006        | 278,533                   | 2007-2011       | $    9.52                                                                                                      |
| Options exercised                           | -               | -               | $          -                                                                |
| Options forfeited                           | (63,000)                  | 2011            | $  14.82                                                                                                                 |
| **Options outstanding at July 31, 2007**    | **215,533**               | **2007-2011**   | **$   7.97**                                                                                                        |

 

 

 

 

 

| Range of exercise price | Number outstanding and exercisable | Weighted average remaining contractual                    life | Weighted average exercise price |
|-------------------------|------------------------------------|----------------------------------------------------------------|---------------------------------|
| $   3.66      | 11,024                             | 2.25 years                                                     | $   3.66              |
| $   3.84      | 71,159                             | 2.42 years                                                     | $   3.84              |
| $   4.34      | 44,100                             | .42 years                                                      | $   4.34              |
| $ 13.58       | 89,250                             | 4.33 years                                                     | $ 13.58                         |

 

 

 

         

         

**F-20**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **7.** | Stock Options                    (continued) | Data summarizing year-end options exercisable and weighted average fair value                    of options granted during the years ended July 31, 2007, 2006 and 2005 is shown                    below: |
|--------|----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Options Exercisable                                                               | **2007**       | 2006       | 2005       |
|-----------------------------------------------------------------------------------|----------------|------------|------------|
| Options exercisable at year-end                                                   | **215,533**    | 278,533    | 283,783    |
| Weighted average exercise price                                                   | **$****7.97**  | $ 9.52     | $ 9.60     |
| Weighted average fair value of options granted                    during the year | -              | -          | -          |
| Weighted average remaining contractual                    life                    | **2.79 years** | 3.16 years | 3.48 years |

 

 

 

 

| **8****.**
                      | **Commitments****and****Contingencies** | *Employee Savings and Stock Investment Plan*

                    Effective January 1, 2006, the Company amended and restated its Employee                    Savings and Stock Investment Plan organized under Section 401(k) of the                    Internal Revenue Code. Under the amended plan, employees may contribute up to                    100% of their salary, limited to the maximum amount allowable under federal tax                    regulations. The Company will match 100% of the first 3% of employees’                    contributions and 50% of the next 2% of employees’ contributions,                    provided that the matching contribution on behalf of any employee does not                    exceed 4% of the employee’s compensation. The Company may also make                    additional contributions at its discretion. An employee may invest in several                    mutual funds. The Company’s matching contributions for the years ended                    July 31, 2007, 2006 and 2005 were $945,000, $876,000 and $785,000,                    respectively. |
|---------------------------------------|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                       |
|                                       |

 

**F-21**

----

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **8****.**
                         | **Commitments****and****Contingencies                    (continued)**
                        | *Employment Agreements*

                    The Company has employment agreements with four executives, which expire                    through July 31, 2010. The aggregate commitment for future salary, excluding                    bonuses, is $2,903,000. One agreement also provides for increases based on                    increases in the consumer price index and additional annual compensation based                    on 4% of pre-tax income, as defined, in excess of $3,000,000. Two other                    agreements provide for increases based on increases in the consumer price index                    and additional annual compensation based on 4% and 1% of income from                    operations, as defined, in excess of $5,000,000.

*Leases*

                    The Company rents various office facilities through 2013 under the terms of                    several lease agreements that include escalation clauses.

                    At July 31, 2007, minimum annual rental commitments under noncancellable                    operating leases are as follows: |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         |
|                                                         |
|                                                         |
|                                                         |

| *Years ending July 31,* |   |       |
|-------------------------|--------|------------|
| 2008                    |   | $1,161,000 |
| 2009                    |   | 501,000    |
| 2010                    |   | 298,000    |
| 2011                    |   | 192,000    |
| 2012                    |   | 160,000    |
| Thereafter              |   | 19,000     |
|                    |   | $2,331,000 |

 

 

 

 

 

|   |   | Rent expense for the years ended July 31, 2007, 2006 and 2005 was approximately                    $1,272,000, $1,353,000, and $1,229,000, respectively.                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |        |                                                                                                                                                                                                                                                                                                                          |
|   |   | One lease agreement is with a company controlled by the Company’s                    Chairman of the Board. For the fiscal years ended July 31, 2007, 2006 and 2005,                    net rent expense under such lease agreement approximated $225,000, $213,000 and                    $213,000, respectively. |

 

**F-22**

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| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **8****.** | **Commitments****and****Contingencies                    (continued)** | *Litigation*

                    On February 28, 2006, Lerai Jones, individually and on behalf of all other                    persons similarly situated, filed a lawsuit against the Company for alleged                    unpaid overtime wages pursuant to the New York Labor Law. Plaintiff seeks to                    certify a class of regular full-time hourly employees working within the State                    of New York. The legal issues in this case are closely intertwined and                    connected to the legal issues in the matter of Coke v. Long Island Care at                    Home 376 F.3d 118 (2d Cir. 2004), which involves the exemption for home                    health care aides under the Fair Labor Standards Act. On August 31, 2006, upon                    a remand from the United States Supreme Court, the United States Court of                    Appeals for the Second Circuit affirmed the decision of the United States                    District Court for the Southern District of New York ruling that the exemption                    did not apply to home health aides employed by third parties. This decision,                    however, was stayed pending an appeal to the United States Supreme Court.                    Because of this appeal of the Coke decision, Jones and the Company                    entered into a stipulation extending the defendant’s time to answer the                    complaint or agreeing to have plaintiff stipulate to a discontinuance of this                    matter within thirty (30) days after a ruling in the Coke decision by                    the United States Supreme Court. On June 11, 2007, the United States Supreme                    Court unanimously overturned the decision of the United States Court of Appeals                    for the Second Circuit and upheld the exemption from overtime wages for home                    health aides. The Company is in the process of effectuating discontinuance of                    this matter. |
|------------|------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

 

 

 

**F-23**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **8****.** | **Commitments****and****Contingencies                    (continued)** | *Litigation (continued)*

                    In October 2003, the Company’s Connecticut Home Care subsidiary received                    a subpoena from the United States Attorney’s Office in New Haven,                    Connecticut. The subpoena sought production of documents in connection with an                    investigation into possible violations of certain federal health care laws. The                    records sought by the subpoena related to the subsidiary’s psychiatric                    nurses. In April 2006, the Company was notified that the investigation has been                    closed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                                                                   | In August 2005, the Connecticut Department of Social Services, Office of                    Quality Assurance (the “Department”) performed an audit of Medical                    Assistance claims paid to the Company’s Connecticut Home Care subsidiary                    covering the period April 1, 2003 through March 31, 2005. The audit included a                    review of relevant claim information maintained by the Department and a review                    of the appropriate medical and administrative records maintained by the                    subsidiary. The subsidiary received approximately $53,000,000 in reimbursement                    during the audit period. The Company, in October 2006, received the results of                    the audit that resulted in a payback of $151,000 to the Department. This amount                    was charged to operations in the fourth quarter of fiscal 2006 and paid in the                    first quarter of fiscal 2007.                                                                                                                                                                                                                                                                                                               |
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|            |                                                                        | On October 3, 2006, the Company’s New York subsidiary received an                    Information Subpoena with Restraining Notice by certified mail in connection                    with a Judgment obtained by Ida Faulkner against the New York subsidiary in the                    amount of $2,149,180 entered on default on January 4, 2005 in the Supreme Court                    of New York, Bronx County. The Company had no prior knowledge of Ms.                    Faulkner’s action, nor of the entry of the default. Upon a review of the                    Court’s file, the Company has ascertained that the action was commenced                    on or about August 21, 2003 and service of the Summons and Verified Complaint                    was made at an incorrect address. All subsequent notices were sent to this                    incorrect address and were not received by the Company. The Verified Complaint                    asserted causes of action for negligence and breach of contract and alleged                    that Ms. Faulkner suffered unspecified personal injuries. On October 6, 2006,                    the Company moved by Order to Show Cause to vacate the default based upon its                    lack of notice of the Summons and Verified Complaint. |

 

**F-24**

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| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **8****.** | **Commitments****and****Contingencies                    (continued)** | *Litigation (continued)*

                    By Stipulation dated January 29, 2007, the default was vacated and the action                    was restored to the court’s active calendar. On February 8, 2007 the                    Company served an Answer asserting numerous defenses to the Verified Complaint.                    The parties are currently engaged in discovery. The Company believes that the                    claims are without merit and losses, if any, would be fully covered by                    insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                                                                   | On November 17, 2006, Americare at Home, Inc. brought an action against Medical                    Resources Home Health Corp. (“MRHHC”), a subsidiary of the Company,                    and certain others, in the Superior Court of the Commonwealth of Massachusetts.                    The plaintiff alleges that there was an existing contract between it and                    defendant Psychiatric Home Care, Inc. (“PHC”) and that MRHHC                    entered into a contract with PHC tortiously interfering with such contract and                    interfering with an advantageous relationship. Plaintiff seeks damages of                    approximately $573,000 against all of the defendants. MRHHC has answered the                    complaint, denied all of the allegations contained therein and is vigorously                    defending the claims. The Company cannot predict the ultimate resolution of                    this matter or the total amount of legal fees or other expenses to be incurred                    in connection with this matter, if any.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |                                                                   | On January 19, 2007, Helaba Invest Kapitalanlagegesellschaft mbH filed a                    verified class action complaint in the Delaware Court of Chancery (the                    “Class Action Complaint”). The suit purportedly was filed on behalf                    of the “public shareholders of the Company.” The Class Action                    Complaint names as defendants the Company and the individual members of its                    board of directors. In the Class Action Complaint, the plaintiff challenges the                    Merger Agreement (See Note 10) and seeks a declaration that the defendants, and                    each of them, have committed or participated in a breach of their fiduciary                    duties of loyalty, good faith and care to the Company’s minority, public                    stockholders by approving the Merger, and causing the Company to enter into the                    Merger Agreement. The plaintiff in the Class Action Complaint seeks preliminary                    and permanent injunctive relief preventing the consummation of the transaction,                    or in the alternative, if the transaction is consummated, rescission of the                    transaction. In the Class Action Complaint, the plaintiff alleged, among other                    things, that the initial Merger consideration of $11.35-$11.50 per Common Share                    was inadequate; that the break up fee in the Merger Agreement is excessive |

 

**F-25**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **8****.** | **Commitments****and****Contingencies                    (continued)** | *Litigation (continued)*

                    and discourages other potentially superior offers for the Company; that two of                    the directors, the largest individual stockholders of the Company, have                    executed voting agreements requiring them to vote in favor of the transaction;                    and that certain terms of the transaction provide financial benefits to                    management and inside directors that create conflicts of interest. The                    defendants filed answers on or about February 13, 2007, denying the material                    allegations of the Class Action Complaint. Plaintiff’s motion for a                    preliminary injunction enjoining the transaction was denied by the Court. The                    parties have agreed in principle to a settlement of the lawsuit in exchange for                    an additional payment of $0.10 per share in cash to all shareholders of the                    Company other than the directors and officers of the Company and their                    families. On October 18, 2007 counsel for the parties executed a memorandum of                    understanding with respect to the settlement. The settlement is subject to                    reaching an agreement on the language of a stipulation of settlement , in which                    the Company will reserve its rights to object to any fee application made by                    plaintiff’s counsel, and conditioned upon additional discovery by                    plaintiff. If a stipulation of settlement is signed, the Court will hold a                    hearing to consider whether to certify the class and approve the settlement. It                    is anticipated that it will take approximately 90 days after the appropriate                    notification procedures to occur.  The additional payment of $0.10 per                    share in connection with the merger will be paid by Acquisition Corp.  If                    the merger is not completed, no payment will be made.  A memorandum of                    understanding has been entered into by the parties to the lawsuit. |
|------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |                                                                        | *Credit Facility*

                    The Company has a $7,500,000 revolving credit facility (the “credit                    facility”) with its bank. The credit facility allows the Company to                    borrow up to $7,500,000 at the bank’s prime rate or LIBOR plus 1.5%. The                    credit facility expires on April 2, 2008 and requires the Company to meet                    certain financial and non-financial covenants. At July 31, 2007 there was no                    outstanding balance under the credit facility. Borrowings are secured by a                    pledge of all of the assets of the Company and its subsidiaries and guaranteed                    by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

 

 

 

 

**F-26**

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| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **9****.** | **Summarized                    Quarterly Data                    (unaudited)** | Presented below is a summary of the unaudited                    consolidated quarterly financial information for the years ended July 31, 2007                    and 2006 (in thousands, except per share data). In the opinion of management,                    all adjustments (consisting of normal recurring accruals) considered necessary                    for a fair presentation have been included. |
|------------|---------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **2007**                                                                                                    |
|-------------------------------------------------------------------------------------------------------------|
| ***Quarter***                                                                                               | **First** | **Second** | **Third          ** | **Fourth** |
| **Net patient revenue**                                                                                     | **$26,234** | **$27,469** | **$27,938                             ** | **$29,168** |
| **Cost of revenue**                                                                                         | **17,432** | **18,247** | **18,625                             ** | **19,712** |
| **General and administrative                    expenses**                                                  | **6,815** | **7,332** | **8,16****8                             ** | **7,02****8** |
| **Amortization of intangibles**                                                                             | **80** | **80** | **80                             ** | **80** |
| **Allowance for possible losses**                                                                           | **380** | **262** | **324                             ** | **287** |
| **          Total                    operating expenses** | **24,707** | **25,921** | **27,197                             ** | **27,107** |
| **Income from operations**                                                                                  | **1,527** | **1,548** | **74****1                              ** | **2,06****1** |
| **Interest income**                                                                                         | **210** | **235** | **21****6                             ** | **24****5** |
| **Income before income taxes**                                                                              | **1,737** | **1,783** | **95****7                             ** | **2,30****6** |
| **Provision for income taxes**                                                                              | **699** | **726** | **1,201                             ** | **1,209** |
| **Net income****(loss)**                                                                                    | **$1,038** | **$1,057** | **                                  ($24****4****) *(a)*** | **1,09****7** |
| **Net income****(loss) per common****share:**                                                               |   |   |   |   |
| **Basic**                                                                                                   | **$0.18** | **$0.19** | **($0.04)                         ** | **$0.19** |
| **Diluted**                                                                                                 | **$0.18** | **$0.18** | **   ($0.04)                         ** | **$0.19** |

 

 

 

 

 

 

 

 

|   | *** (a)*** | *Net loss is a result of professional fees related to Merger                    Agreement.  Approximately $1.6 million of professional fees were incurred                    in the third quarter of fiscal 2007.  (See Note                    10).* |
|--------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2006                                                                                                    |
|---------------------------------------------------------------------------------------------------------|
| *Quarter*                                                                                               | First | Second | Third | Fourth |
| Net patient revenue                                                                                     | $26,321 | $25,670 | $25,032 | $25,342 |
| Cost of revenue                                                                                         | 17,315 | 16,972 | 16,906 | 17,052 |
| General and administrative expenses                                                                     | 7,039 | 7,062 | 6,807 | 6,705 |
| Amortization of intangibles                                                                             | 110 | 99 | 98 | 97 |
| Allowance for possible losses                                                                           | 105 | 173 | 132 | 149 |
|           Total                    operating expenses | 24,569 | 24,306 | 23,943 | 24,003 |
| Income from operations                                                                                  | 1,752 | 1,364 | 1,089 | 1,339 |
| Interest income                                                                                         | 95 | 122 | 128 | 186 |
| Income before income taxes                                                                              | 1,847 | 1,486 | 1,217 | 1,525 |
| Provision for income taxes                                                                              | 705 | 595 | 495 | 625 |
| Net income                                                                                              | $ 1,142 | $   891 | $   722 | $   900 |
| Net income per common share:                                                                            |   |   |   |   |
| Basic                                                                                                   | $0.20 | $0.16 | $0.13 | $0.16 |
| Diluted                                                                                                 | $0.20 | $0.16 | $0.13 | $0.16 |

 

 

 

 

         

 

 

 

 

 

 

 

 

**F-27**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **10****.** | **Subsequent                    Events** | On August 30, 2007, the Company, AG Home Health Acquisition Corp., a Delaware                    corporation (the “Acquisition Corp”), and AG Home Health LLC, a                    Delaware limited liability company (the “Parent”) extended until                    November 21, 2007 the termination date under the Amended and Restated Agreement                    and Plan of Merger, dated May 9, 2007, as amended by Amendment No. 1 on June 4,                    2007 (the “Amended Merger Agreement”). Pursuant to the Amended                    Merger Agreement and subject to the conditions set forth therein, the                    Acquisition Corp. will merge with and into the Company, with the Company                    continuing as the surviving corporation under the laws of the State of                    Delaware. The Parent is an affiliate of Angelo, Gordon & Co. |
|-------------|------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |                                     | At the effective time and as a result of the merger, each share of the                    Company’s common stock, par value $.001 per share (each a “Common                    Share”) issued and outstanding immediately prior to the effective time                    will be cancelled, extinguished and converted into the right to receive $12.75                    per share, payable in cash (the “Merger Consideration”). Pursuant                    to a separate agreement among the Company, the Acquisition Corp, the Parent and                    Mr. Frederick H. Fialkow, Mr. Fialkow will contribute a portion of his Common                    Shares to the Company in exchange for a 8% subordinated note in a principal                    amount equal to the amount of cash he would otherwise have received for such                    Common Shares.                                     |
|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |                                     | At the effective time of the merger, all options issued under the                    Company’s Stock Option Plans shall be converted into the right to receive                    a cash payment equal to the product of (i) the total number of Common Shares                    otherwise issuable upon exercise of such option and (ii) the amount, if any, by                    which the Merger Consideration per Common Share exceeds the applicable exercise                    price per Common Share of such option.                                                                                                                                                                                                                                                                                                                                                                                                                |
|             |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |                                     | A lawsuit has been commenced against the Company and its directors. The Amended                    Merger Agreement includes a provision whereby the Parent consents to an                    additional payment of $0.10 per share in cash to all Company shareholders other                    than the executive officers and directors of the Company and members of their                    families in settlement of such action, subject to certain conditions.  The                    additional payment of $0.01 per share in connection with the merger will be                    paid by Acquisition Corp.  If the merger is not completed, no payment will                    be made.  A memorandum of understanding has been entered into by the                    parties to the lawsuit.  (See Note 8).                                                                                                     |

 

 

**F-28**

----

         

| **National Home Health                    Care Corp.**            |
|-------------------------------------------------------------------|
| **and                    Subsidiaries**                           |
|                                                              |
|                                                              |
| **Notes to Consolidated                    Financial Statements** |
|                                                                   |

 

| **1****0****.** | **Subsequent                    Events                    (continued)** | Substantially all material conditions precedent to consummation of the merger,                    including approval by the shareholders of the Company, have been satisfied                    except for authorization by the New York State Department of Health.    |
|-----------------|-------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |                                                                         |                                                                                                                                                                                                                                                                         |
|            |                                                                    | On September 24, 2007, the Company’s Board of Directors declared a cash                    dividend of $.175 per share on its common stock, payable November 2, 2007 to                    holders of record of its outstanding common stock on October 16, 2007. |
|            |                                                                    |                                                                                                                                                                                                                                                                    |

 

**F-29**

----

         

         

         

**Supplemental Material**

         

         

         

         

         

         

----

**Report of Independent Registered Public Accounting        Firm**                                        on Schedule II

The audits referred to in our        report dated October26, 2007 relating to the        consolidated financial statements of National Home Health Care Corp. and Subsidiaries,        which is contained in Item 8 of this Form 10-K, included the audit of the financial        statement Schedule II. This financial statement schedule is the responsibility of the        Company’s management. Our responsibility is to express an opinion on this financial        statement schedule based upon our audit.

In our opinion such financial statement schedule presents        fairly, in all material respects, the information set forth therein.

/s/        BDO Seidman, LLP

BDO Seidman, LLP

        Valhalla, New York        October 26, 2007

         

         

**F-30**

----

| **National Home Health                    Care Corp.**               |
|----------------------------------------------------------------------|
| **and                    Subsidiaries**                              |
|                                                                 |
|                                                                 |
| **Schedule II Valuation                    and Qualifying Accounts** |
|                                                                      |

         

| Column A                               | Column B                                        | Column C                                                         | Column D                                                                                                                                                                   | Column E                                                  |
|----------------------------------------|-------------------------------------------------|------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|
|                                   |                                            | Additions                                                        |                                                                                                                                                                       |                                                      |
| Description                            | Balance, beginning                    of period | Charged to costs and expenses                                    | Charged to other accounts describe                                                                                                                                         | Deductions describe                                       | Balance, end of period |
| Year ended July 31, 2007               |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance deducted from asset account: |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance for possible losses          | **$1,419,000**                                  | **$  1,253,000**                                            | **$                                            -** | **$1,795,000***(a)*                                       | **$  877,000** |
| Year ended July 31, 2006               |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance deducted from asset account: |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance for possible losses          | $  1,866,000                          | $                          559,000 | **$                                            -** | $                     1,006,000*(a)*                 | $1,419,000 |
| Year ended July 31, 2005               |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance deducted from asset account: |                                            |                                                             |                                                                                                                                                                       |                                                      |   |
| Allowance for possible losses          | $  1,122,000                               | $    1,280,000                                    | $                         -                   | $                        536,000*(a)* | $1,866,000 |

| *(a) Represents actual write-offs.* | *See accompanying independent accountants’                    report **on supplemental material.* |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------|

 

*                                                                                                               *

         

**F-31**